Exhibit 10.3

 
EXECUTION COPY
 
AMENDMENT NO. 005 AND CONSENT

THIS AMENDMENT NO. 005 AND CONSENT (“Amendment”) is made as of this 25th day of
October, 2006, between General Electric Capital Corporation (“Secured Party”)
and Discovery Laboratories, Inc. (“Debtor”), to that certain Master Security
Agreement dated as of December 20, 2002 (as amended, modified, restated,
supplemented or replaced from time to time, and together with any schedules
thereto, collectively, the “Agreement”). The terms of this Amendment No. 005 are
hereby incorporated into the Agreement as though fully set forth therein.
Secured Party and Debtor mutually desire to amend the Agreement as set forth
below. Section references below refer to the section numbers of the Agreement.
Unless otherwise defined herein, all capitalized terms herein shall have the
respective meanings assigned to such terms in the Agreement.

Background

The Agreement requires that Debtor abide by certain covenants and warranties as
more particularly set forth therein. Section 2 of the Agreement prohibits Debtor
from, among other things, granting any liens on the Collateral or its
Intellectual Property, except for Permitted Liens.

Prior to the date hereof, Debtor entered into a financing transaction with
PharmaBio Development Inc. dba NovaQuest (“ParmaBio”), pursuant to that certain
Amended and Restated Security Agreement dated December 10, 2001 (as amended and
restated as of November 3, 2004, the PharmaBio Agreement”). In connection with a
restructuring of its obligations under the PharmaBio Agreement, Debtor has
requested that Secured Party (i) consent to its providing PharmaBio additional
collateral, including a security interest in Debtor’s Intellectual Property,
(ii) agree to certain amendments to the Agreement, and (iii) enter into a
subordination agreement with PharmaBio (the events set forth in the foregoing
clauses (i), (ii), and (iii) are, collectively, the “Event”). Secured Party has
agreed to consent to the Event on the terms and subject to the conditions set
forth herein.

In consideration of the foregoing, the terms and conditions set forth in this
Amendment, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Debtor and Secured Party hereby
agree as follows:

I.    Consent.
 
Debtor has requested that Secured Party consent to the Event and Secured Party
hereby consents (the “Consent”) to the Event subject to the terms and conditions
described herein. Except for the Consent and the amendments to the Agreement
expressly set forth and referred to in this Amendment, the Agreement shall
remain unchanged and in full force and effect, and the Consent shall be limited
precisely and expressly as drafted and shall not be construed as a consent to
the modification, amendment or supplementation of any other terms or provisions
of the Agreement. Nothing in the Consent is intended, or shall be construed, to
constitute a novation or an accord and satisfaction of any of Debtor’s
indebtedness under or in connection with the Agreement or any other indebtedness
to Secured Party.
 

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II.    Amendments to Agreement.

A.    Creation of Security Interest. Section 1 of the Agreement is hereby
amended and restated in its entirety to read as follows:

“(a) Debtor hereby grants to Secured Party, its successors and assigns, a
security interest in and against all property listed on any collateral schedule
now, previously or in the future annexed to or made a part of this Agreement
(collectively, "Collateral Schedule"), and in and against all additions,
attachments, accessories and accessions to such property, whether now owned or
hereafter acquired or arising, all substitutions, replacements or exchanges
therefor, and all insurance and/or other proceeds thereof (all such property is
individually and collectively called the "Collateral"). This security interest
is given to secure the payment and performance of all debts, obligations and
liabilities of any kind whatsoever of Debtor to Secured Party, now existing or
arising in the future, including but not limited to the payment and performance
of certain Promissory Notes from time to time identified on any Collateral
Schedule (collectively "Notes" and each a "Note"), and any renewals, extensions
and modifications of such debts, obligations and liabilities (such Notes, debts,
obligations and liabilities are called the "Indebtedness").
 
(b) On and as of October 23, 2006, Debtor further grants to Secured Party, its
successors and assigns, a security interest in and against all property, and in
and against all additions, attachments, accessories and accessions to such
property, whether now owned or hereafter acquired or arising, all substitutions,
replacements or exchanges therefor, and all insurance and/or other proceeds
thereof, listed on Collateral Schedule No. 0001(the “Additional Supplemental
Collateral”) and made a part hereof. The Additional Supplemental Collateral
shall for all purposes constitute “Collateral” under the terms of the Agreement.
This security interest in the Additional Supplemental Collateral is given to
secure the payment and performance of all Indebtedness. In the event that
PharmaBio consents to Debtor entering into the licensing, sublicensing,
partnering, or other similar agreements, strategic alliances and collaborations
for the development, marketing and commercialization of the Product, or any
portion or component thereof (a “Permitted Event”), Secured Party shall be
deemed to have consented thereto to the extent of PharmaBio’s consent, subject
to the terms and conditions thereof and provided that Secured Party’s security
interest in and lien on the Additional Supplemental Collateral shall continue to
be in full force and effect. For the sake of clarity, Permitted Event shall not
include any amendments to the definition of Additional Supplemental Collateral
or other modifications to what assets constitute Additional Supplemental
Collateral (“Collateral Modification”). In the event that Debtor requests that
Secured Party consent (not to be unreasonably withheld) to a Collateral
Modification, Debtor shall provide prior written notice (“Notice”) to Secured
Lender of such Collateral Modification together with a description thereof in
reasonable detail. Secured Lender shall have five (5) business days after
Secured Party’s receipt of such Notice to object to such Collateral
Modification. In the event that Secured Lender fails to timely object in writing
to the Collateral Modification, Secured Party shall be deemed to have consented
to the Collateral Modification. Subject to the foregoing and Section 3(g) of
this Agreement, Secured Party’s security interest in and lien on the Additional
Supplemental Collateral shall continue to be in full force and effect until the
earlier of (i) Secured Party’s consent under the terms hereof to the release
thereof and (ii) all obligations of Debtor to Secured Party, including, without
limitation, the Indebtedness, are paid in full and all obligations of Secured
Party under this Agreement are terminated. In the event that Secured Party
consents to a release of its lien on any property that constitutes Additional
Supplemental Collateral or all obligations of Debtor to Secured Party are paid
in full in accordance with the terms hereof, Secured Party hereby agrees that it
will, at Debtor’s expense (and in any event within 15 business days), file
termination statements and execute such other documents and acknowledgments that
Debtor may reasonably request to effect such release. “Product” shall mean the
product currently known as Surfaxin, as such name may change from time to time,
for any and all formulations and delivery mechanisms, and for any and all
indications.”
 
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B.    Amendment to Section 3. Section 3 is hereby amended to add a new
Subsection 3(g) thereto immediately following Subsection 3(f) which shall read
as follows:
 
“(g) Upon the occurrence of (i) receipt by Debtor of regulatory approval by the
United States Food and Drug Administration for the indication of respiratory
distress syndrome in premature infants for the Product, or (ii) such other
events or conditions mutually acceptable to Secured Lender and Debtor
(collectively, “Milestones”), and, in each case, provided that no default or
event of default has occurred and is continuing, Secured Party shall terminate
its lien in the Supplemental Collateral and Additional Supplemental Collateral
(collectively, the “Released Collateral”). In the event that (x) Secured Party
and Debtor are unable to agree on mutually acceptable Milestones and (y) Debtor
elects to prepay all of the outstanding Indebtedness while Secured Party holds a
perfected security interest in the Released Collateral, Debtor shall be entitled
to prepay all of the outstanding Indebtedness in full without prepayment
penalty. Secured Party agrees that any waiver fee assessed in connection with
determining the Milestones hereunder shall not exceed $5,000. Secured Party
hereby agrees that it will, upon (A) satisfaction of the provisions set forth in
Subsections (i) or (ii) hereof or (B) prepayment in full of the outstanding
Indebtedness in accordance with this Section 3(g), and at Debtor’s expense,
promptly file (and in any event within 15 business days) termination statements
and execute such other documents and acknowledgments that Debtor may reasonably
request to effect the termination of its lien on the Released Collateral.”

III.    Acknowledgement of Outstanding Indebtedness; Payment of Obligations;
Limitation of Availability.
 

 
(a)
Debtor hereby acknowledges, confirms and agrees that, as of the close of
business on the date hereof, Debtor is indebted to Secured Party in respect of
the Indebtedness in the principal amount of $4,701,912, plus interest accrued
and accruing thereon, fees, costs, expenses and other charges now or hereafter
payable under the Agreement.

 

 
(b)
Debtor understands, acknowledges and agrees that it shall continue to make all
payments when and as due under the terms and conditions of the Agreement.

 
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(c)
 
Debtor hereby acknowledges and agrees that Secured Party has no obligation to
make any advances under the Agreement or otherwise in excess of $400,000 in the
aggregate on or after the date of this Amendment, and that any such advances
shall be made at the sole discretion of Secured Party.

IV.
Reaffirmation of Grants of Security Interests; Additional Supplemental
Collateral Schedule.

 
(a)
Debtor hereby acknowledges, reaffirms and confirms its grants of security
interests in the Collateral under the Agreement or otherwise in favor of Secured
Party, including without limitation, the Supplemental Collateral, any Additional
Collateral, and all equipment and other property constituting Collateral,
including all substitutions, replacements or exchanges therefor, and all
insurance and/or other proceeds thereof, and agrees that, notwithstanding the
effectiveness of this Amendment and the consummation of the transactions
contemplated hereby, such grants of security interests shall continue to be in
full force and effect and shall accrue to the benefit of the Secured Party.

 
(b)
Collateral Schedule No. 0001 attached hereto as Exhibit A is hereby annexed to
and made a part of the Agreement and describes the Additional Supplemental
Collateral in which Debtor has granted Secured Party a security interest in
connection with the Indebtedness. The Additional Supplemental Collateral shall
for all purposes constitute “Collateral” under the terms of the Agreement.

V.    Fee
 
In consideration of Secured Party’s agreement to grant the Consent and enter
into this Amendment, Debtor unconditionally agrees to pay to Secured Party a fee
(the “Fee”) equal to Ten Thousand and No/100 Dollars ($10,000.00), which Fee
shall (a) be deemed earned and payable by Debtor on the date of the execution
and delivery of this Amendment by Debtor, and (b) constitute a portion of the
Indebtedness secured by the Agreement.

EXCEPT AS EXPRESSLY AMENDED HEREBY, THE AGREEMENT SHALL REMAIN IN FULL FORCE AND
EFFECT. IF THERE IS ANY CONFLICT BETWEEN THE PROVISIONS OF THE AGREEMENT AND
THIS AMENDMENT NO. 005, THEN THIS AMENDMENT NO. 005 SHALL CONTROL.

 
[SIGNATURE PAGE FOLLOWS]
 
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IN WITNESS WHEREOF, the parties hereto have executed this Amendment No.005 by
signature of their respective authorized representative set forth below.
 

General Electric Capital Corporation    Discovery Laboratories, Inc.       By:
/s/ Diane Earle    By: /s/ John G. Cooper       Name: Diane Earle     Name: John
G. Cooper       Title: Duly Authorized Signatory      
Title: Executive Vice President and
     Chief Financial Officer

 
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