UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB/A
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------- ------------------
Commission file number 0-28931
BioDelivery Sciences International, Inc.
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(Exact name of small business issuer as specified in its charter)
Delaware
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(State or other jurisdiction of
incorporation or organization)
35-2089858
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(I.R.S. Employer Identification No.)
185 South Orange Avenue, Administrative Building 4
Newark, New Jersey 07103
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(Address of principal executive offices)
(973) 972-0015
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(Issuer's telephone number)
The Issuer had 7,085,863 shares of common stock issued and 6,985,863 shares of
common stock outstanding as of August 14, 2003.
The Company is hereby amending its Quarterly report on Form 10-Q for the period
ended June 30, 2003, principally in order to order to (i) update certain
disclosures relating to its Bioral Nutrient Delivery, LLC subsidiary and (ii)
file certain exhibits relating to such subsidiary. No financial statements in
this Form have been amended. In addition, BioDelivery Sciences International
reserves the right to amend the structure of Bioral Nutrient Delivery, LLC for
any reason."
BioDelivery Sciences International, Inc. and Subsidiary
Form 10-QSB
Index
Part I. Financial Information Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2003 (unaudited)
and December 31, 2002............................................................2
Condensed Consolidated Statements of Operations for the three and six
months ended June 30, 2003 and 2002 (unaudited)..................................3
Condensed Consolidated Statement of Stockholders' Equity for the six months
ended June 30, 2003 (unaudited)..................................................4
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2003 and 2002 (unaudited)...............................................5
Condensed Consolidated Statements of Comprehensive Loss for the six months
ended June 30, 2003 and 2002 (unaudited).........................................6
Notes to Condensed Consolidated Financial Statements (unaudited).....................7
Item 2. Management's Discussion and Analysis or Plan of Operation......................17
Item 3. Controls and Procedures........................................................22
Part II. Other Information
Item 1. Legal Proceedings..............................................................24
Item 6. Exhibits and Reports on Form 8-K...............................................24
Signatures..............................................................................S-1
Certifications...........................................................................
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2003 AND DECEMBER 31, 2002
ASSETS
June 30,
2003 December 31,
(unaudited) 2002
------------ ------------
Current assets:
Cash and cash equivalents $ 2,522,872 $ 5,207,303
Marketable equity securities, available for sale 549,025 --
Investments 1,923,437 --
Accounts receivable -- 2,000,000
Prepaid expenses and other current assets 114,460 201,518
------------ ------------
Total current assets 5,109,794 7,408,821
Equipment, net 731,562 435,061
Licenses 500,197 517,445
Other assets, net 27,904 28,855
------------ ------------
Total assets $ 6,369,457 $ 8,390,182
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of note payable, bank $ 95,925 $ --
Accounts payable and accrued liabilities 288,016 538,010
Due to related parties -- 51,725
Deferred revenue 800,000 2,000,000
Current maturities of capital lease obligation 11,128 12,775
------------ ------------
Total current liabilities 1,195,069 2,602,510
Capital lease obligation, less current maturities -- 4,742
Note payable, bank, less current maturities 558,370 --
Commitments and contingencies -- --
Stockholders' equity:
preferred stock, $.001 par value, 20,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $.001 par value 80,000,000 shares
authorized, 7,085,863 shares issued; 6,985,863
and 7,085,863 outstanding in 2003 and 2002, respectively 7,086 7,086
Additional paid-in capital 13,979,549 13,956,327
Treasury stock, at cost, 100,000 shares (303,894) --
Accumulated deficit (9,059,520) (8,180,483)
Accumulated other comprehensive loss (7,203) --
------------ ------------
Total stockholders' equity 4,616,018 5,782,930
------------ ------------
Total liabilities and stockholders' equity $ 6,369,457 $ 8,390,182
============ ============
The accompanying notes are an integral part of these financial statements.
2
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Sponsored research revenues $ 255,000 $ 182,972 $ 510,250 $ 457,972
License fees, related party 600,000 -- 1,200,000 --
----------- ----------- ----------- -----------
855,125 182,972 1,710,250 457,972
----------- ----------- ----------- -----------
Expenses:
Research and development 642,672 459,078 1,286,167 909,553
General and administrative 543,577 195,038 1,357,597 400,806
----------- ----------- ----------- -----------
Total expenses 1,186,249 654,116 2,643,764 1,310,359
----------- ----------- ----------- -----------
Interest income (expense), net 23,994 (25,949) 54,477 (35,763)
----------- ----------- ----------- -----------
Loss before income taxes (307,130) (497,093) (879,037) (888,150)
Income tax benefit (expense) -- (40,879) -- 54,964
----------- ----------- ----------- -----------
Net loss $ (307,130) $ (537,972) $ (879,037) $ (833,186)
============ ============ ============ ============
Net loss per common share:
Basic and diluted $ (0.04) $ (0.11) $ (0.12) $ (0.17)
============ ============ ============ ============
Weighted average common stock
shares outstanding - basic
and diluted 7,010,566 5,066,796 7,048,007 5,034,011
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
3
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(Unaudited)
Accumulated
Other
Preferred Stock Common Stock Additional Comp- Total
-------------- -------------------- Paid-In Treasury Accumulated rehensive Stockholders'
Shares Amount Shares Amount Capital Stock Deficit Income Equity
------ ------ ----------- -------- ----------- ----------- ----------- ------- -----------
Balance at
December 31, 2002 -- $ -- 7,085,863 $ 7,086 $13,956,327 $ -- $(8,180,483) $ -- $ 5,782,930
Issuance of common
stock options -- -- -- -- 23,222 -- -- -- 23,222
Unrealized loss on marketable
equity securities -- -- -- -- -- -- -- (7,203) (7,203)
Repurchase of treasury stock -- -- -- -- -- (303,894) -- -- (303,894)
Net loss -- -- -- -- -- -- (879,037) -- (879,037)
------ ------ ----------- -------- ----------- ----------- ----------- ------- -----------
Balance at June 30, 2003 -- $ -- 7,085,863 $ 7,086 $13,979,549 $ (303,894) $(9,059,520) $(7,203) $ 4,616,018
====== ====== =========== ======== =========== =========== =========== ======= ===========
The accompanying notes are an integral part of these financial statements.
4
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
Six Months Ended
June 30,
-------------------------
2003 2002
----------- -----------
Operating activities:
Net loss $ (879,037) $ (833,186)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 83,696 60,137
Stock-based compensation 23,222 --
Changes in assets and liabilities:
Accounts receivable 2,000,000 --
Prepaid expenses and other current assets 87,058 (405,516)
Accounts payable and accrued liabilities (249,994) 548,802
Deferred revenue (1,200,000) (37,000)
----------- -----------
Net cash flows from operating activities (135,055) (617,209)
Investing activities:
Purchase of equipment (361,998) (608)
Net purchase of marketable equity securities and
investments (2,479,665) --
----------- -----------
Net cash flows from investing activities (2,841,663) (608)
Financing activities:
Issuance of common stock -- 8,647,933
Net change in short-term borrowings 654,295 (282,527)
Repurchase of treasury stock (303,894) --
(Payments on) borrowings from related parties (51,725) 49,554
Payment on notes and capital leases payable (6,389) (104,611)
----------- -----------
Net cash flows from financing activities 292,287 8,260,795
Net change in cash and cash equivalents (2,684,431) 7,642,978
Cash and cash equivalents at beginning of period 5,207,303 75,513
----------- -----------
Cash and cash equivalents at end of period $ 2,522,872 $ 7,718,491
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
------------------------------------------------
Non-cash investing and financing activities:
Unrealized losses on marketable equity securities $ (7,203) $ --
=========== ===========
Net loss ($ 879,037) $ (833,186)
Other comprehensive loss:
Unrealized loss on marketable equity securities (7,203) --
----------- -----------
Comprehensive loss $ (886,240) $ (833,186)
=========== ===========
Note:Accumulated comprehensive loss consists exclusively of unrealized losses on
marketable equity securities.
The accompanying notes are an integral part of these financial statements.
5
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
1. The condensed consolidated balance sheets of BioDelivery Sciences
International, Inc. and its majority-owned subsidiary, Bioral Nutrient
Delivery, LLC (collectively the "Company") as of June 30, 2003, and the
condensed consolidated statements of operations for the three and six
months ended June 30, 2003 and 2002 have been prepared by the Company
without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows at June 30,
2003 and for all periods presented, have been made. The condensed
consolidated balance sheet at December 31, 2002, has been derived from
the Company's audited consolidated financial statements at that date.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to the Securities and Exchange Commission ("SEC") rules
and regulations. These condensed consolidated financial statements should
be read in conjunction with the audited consolidated financial statements
and notes thereto for the year ended December 31, 2002, included in the
Company's 2002 Annual Report on Form 10-KSB filed with the SEC on March
28, 2003 ("2002 Annual Report").
The results of operations for the three and six months ended June 30,
2003, are not necessarily indicative of results that may be expected for
any other interim period or for the full fiscal year.
The accompanying consolidated financial statements include the accounts
of BioDelivery Sciences International, Inc. and its majority-owned
subsidiary, Bioral Nutrient Delivery, LLC. All intercompany accounts and
transactions have been eliminated.
2. Summary of significant accounting policies:
Marketable securities:
Marketable equity securities are recorded at fair value. Unrealized
losses on these securities are recorded as other comprehensive loss as a
component of equity. Proceeds and gross realized losses from the sale of
these securities was $3,498,314 and ($1,685), respectively, for the six
months ended June 30, 2003.
7
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
2. Summary of significant accounting policies (continued):
Investments:
Investments consist of certificates of deposit with an original maturity in
excess of 3 months and are recorded at cost plus interest thereon.
Revenue recognition:
Sponsored research amounts are recognized as revenue when the research
underlying such payments has been performed or when the funds have
otherwise been utilized, such as for the purchase of operating assets.
License fees are up-front payments for the initial license of and access to
the Company's technology. For nonrefundable license fees received at the
initiation of license agreements for which the Company has an ongoing
research and development commitment, the Company defers these fees and
recognizes them ratably over the period of the related research and
development. For nonrefundable license fees received under license
agreements where the continued performance of future research and
development services is not required, the Company recognizes revenue upon
delivery of the technology. In addition to license fees, the Company may
also generate revenue from time to time in the form of milestone payments.
Milestone payments are only received and recognized as revenues if the
specified milestone is achieved and accepted by the customer and continued
performance of future research and development services related to that
milestone are not required. To date, no milestone payments have been
received.
Stock based compensation:
The Company follows Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation (SFAS 123), which establishes
a fair value based method of accounting for stock-based employee
compensation plans; however, the Company has elected to account for its
employee stock compensation plans using the intrinsic value method under
Accounting Principles Board Opinion No. 25 with pro forma disclosures of
net earnings and earnings per share, as if the fair value based method of
accounting defined in SFAS 123 had been applied.
8
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
2. Summary of significant accounting policies (continued):
The following table reflects supplemental financial information related to
stock-based employee compensation, as required by Statement of Financial
Accounting Standards No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION -
TRANSITION AND DISCLOSURE.
June 30, June 30,
2003 2002
------------- -------------
Net loss, as reported $ (879,037) $ (833,186)
============= =============
Stock-based compensation, as reported $ 23,222 -
============= =============
Stock-based compensation under fair value method $ 99,788 -
============= =============
Pro-forma net loss under fair value method $ (955,603) $ (833,186)
============= =============
Net loss per share, as reported $ (0.12) $ (0.17)
============= =============
Pro-forma net loss per share under fair value method $ (0.13) $ (0.17)
============= =============
Recent accounting pronouncements:
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. The statement
amends and clarifies accounting and reporting for derivative
instruments, including certain derivative instruments embedded in
other contracts, and hedging activities. This statement is designed
to improve financial reporting such that contracts with comparable
characteristics are accounted for similarly. The statement, which is
generally effective for contracts entered into or modified after June
30, 2003, is not anticipated to have a significant effect on the
Company's financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity. This statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. This statement is
effective for financial instruments entered into or modified after
May 31, 2003, and is otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. The Company
currently has no such financial instruments outstanding or under
consideration and therefore adoption of this standard currently has
no financial reporting implications.
9
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
2. Summary of significant accounting policies (continued):
Recent accounting pronouncements (continued):
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Valuable Interest Entities. This interpretation clarifies rules relating
to consolidation where entities are controlled by means other than a
majority voting interest and instances in which equity investors do not
bear the residual economic risks. This interpretation is effective
immediately for variable interest entities created after January 31, 2003
and for interim periods beginning after June 15, 2003 for interests
acquired prior to February 1, 2003. The Company currently has no ownership
in variable interest entities and therefore adoption of this standard
currently has no financial reporting implications.
3. Subsidiary corporate structure:
On January 8, 2003, the Company formed Bioral Nutrient Delivery, LLC, a
Delaware limited liability company ("BND") as a majority-owned subsidiary.
Effective April 1, 2003, the Company granted to BND an exclusive worldwide
perpetual sub-license to the Company's proprietary encochleation drug
delivery technology for non-pharmaceutical use in the processed food and
beverage industries for both human and animal consumption. BND is governed
by a limited liability company operating agreement, dated January 8, 2003.
The agreement was executed by the Company (as the managing member and a
holder of 708,586 of BND's Class A Membership Shares, or Class A Shares,
and 8,600,000 Class B Membership Shares) and certain other individuals and
entities (as the holders of an aggregate of 412,500 Class B Shares). These
individuals have no cost basis in this subsidiary and no obligation to fund
deficits, therefore, no minority interest has been recorded.
BND has begun the process of identifying potential licensees who might
apply the Company's encochleating technology to processed foods, including
snacks such as chips, candies, breads, canned goods, packaged meals (such
as microwaveable entrees), pet foods and pet treats, cheeses, cereals,
soups, popcorn, pretzels and condiments. BND further believes the
technology might be applied to beverages, including sports drinks, enhanced
waters, carbonated beverages, infant formulas, milk, juices, beer and wine.
BND is seeking to commercialize the delivery technology through a
combination of licensing programs to manufacturing, marketing and
distribution companies within these industries.
10
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
3. Subsidiary corporate structure (continued):
BND has filed a registration statement on Form SB-1 on behalf of BDSI.
BDSI, as selling security holder, intends initially to distribute as a
dividend to its current and future stockholders rights to purchase an
aggregate of up to 11,277,000 of the Company's Class B Membership Shares.
Such rights to purchase such amount of Class B Shares are referred to
herein as the "Rights."
BDSI will receive proceeds upon the exercise of the Rights. BND, however,
will not receive any of the proceeds upon the exercise of Rights and the
resulting transfer by BDSI of Class B Shares. Neither the Rights nor equity
interests (including the Class B Shares which will be received upon the
exercise of the Rights) are or will be listed on any exchange and will not
be publicly-traded securities. No such rights have been distributed by BDSI
to its stockholders as of June 30, 2003.
Because neither BDSI nor BND will receive any proceeds from the initial
rights distribution, offering costs aggregating $148,039 have been expensed
in the accompanying statement of operations. Total offering costs are
estimated to be $225,000.
BDSI has been granted an option to purchase up to 4,000,000 Class B Shares
at a price equal to $0.01 per Class B Share. If BDSI chooses to exercise
that option, BND will receive the proceeds.
4. Liquidity and management's plans:
Since inception, the Company has financed its operations principally from
the sale of equity securities, through short-term borrowings, some of which
were subsequently repaid, and from funded research arrangements. The
Company has not generated revenue from the sale of any product but has
generated revenues from licensing arrangements in 2003. The Company intends
to finance its research and development efforts and its working capital
needs from existing cash, investments, new sources of financing, exercise
of rights to purchase interests in its subsidiary and licensing agreements.
For instance, the Company was granted approximately $2.7 million from the
National Institutes of Health to fund specific research efforts conducted
by the Company through June 2004, of which $1.9 million has been received
through June 30, 2003, and the balance of $800,000, which has been approved
for funding through August 2004. It was also awarded a second NIH grant in
August 2002, for $600,000 over 2 years.
In the second quarter of 2003, the Company closed a $1 million, four year
bank loan, with a 75% loan to value ratio, at an interest rate of 7.5%, to
be used in the purchase of laboratory and other equipment and facilities
improvements in the Newark lab. The collateral will be all equipment owned.
The loan was closed in April 2003 with an initial draw of $650,000. The
loan was fully funded in July 2003.
11
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
4. Liquidity and management's plans :
On June 24, 2002, the Securities and Exchange Commission declared effective
the Company's Registration Statement on Form SB-2, Registration No.
333-72877. Commencing on June 25, 2002, and pursuant to such Registration
Statement, the Company conducted an offering consisting of 2,000,000 units
with each unit consisting of (i) one share of common stock, par value $.001
per share, and (ii) one Class A common stock purchase warrant. Each warrant
entitles the owner to purchase one share of Company common stock at a price
of $6.30 for a period of four years commencing on June 24, 2003. No
warrants have been exercised as of June 30, 2003. Refer to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2002 for
further detail relating to this offering.
5. Marketable equity securities:
Marketable equity securities consist of corporate fixed income bonds and
money market fund shares. The Company's marketable securities have been
classified as available-for-sale and are recorded at current market value
with changes in the difference between market value and cost recorded as an
adjustment to stockholders' equity. The investment in marketable securities
was made in February 2003 and gross unrealized holding losses aggregated
$7,203 at June 30, 2003. Interest income is recorded on the accrual basis.
Dividends are recorded on the ex-dividend date.
6. Licenses:
Licenses consist of the following:
June 30, December 31,
2003 2002
----------------- ---------------
Licensing costs $ 517,445 $ 517,445
Less accumulated amortization (17,248) -
----------------- ---------------
$ 500,197 $ 517,445
================= ===============
12
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
6. Licenses (continued):
Estimated aggregate future amortization expense for each of the next five
years is as follows:
Year ending June 30,
--------------------
2004 $ 34,496
2005 34,496
2006 34,496
2007 34,496
2008 34,496
Thereafter 327,717
---------
$ 500,197
=========
7. Note payable, bank:
Note payable, bank consists of borrowings under a $1,000,000 four year team loan
with interest only payable monthly at 7.50% through October 2003 and interest
and principal payable monthly from November 2003 through October 2007.
Borrowings on the line of credit are limited to the sum of 75% of the loan to
cost/value of all equipment of the Company. The note is secured by all equipment
of the Company.
The line of credit agreement contains various restrictive covenants, including a
minimum cash-to-liability ratio. The Company was in compliance with these
covenants as of June 30, 2003.
13
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
8. Net loss per common share:
The following table reconciles the numerators and denominators of the basic and
diluted income per share computations.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ----------------------------
2003 2002 2003 2002
--------------- --------------- -------------- -----------
Net loss - (numerator) $ (307,130) $ (537,972) $ (879,037) $ (833,186)
=============== =============== ============== ===========
Basic:
Weighted average shares
outstanding (denominator) 7,010,566 5,066,796 7,048,007 5,034,011
=============== =============== ============== ===========
Net loss per common
share - basic $ (0.04) $ (0.11) $ (0.12) $ (0.17)
=============== =============== ============== ===========
Diluted:
Weighted average shares
outstanding 7,010,566 5,066,796 7,048,007 5,034,011
Effect of dilutive securities -- -- -- --
--------------- --------------- -------------- -----------
Adjusted weighted average
shares (denominator) 7,010,566 5,066,796 7,048,007 5,034,011
=============== =============== ============== ===========
Net loss per common
share - diluted $ (0.04) $ (0.11) $ (0.12) $ (0.17)
=============== =============== ============== ===========
The effects of all stock options and warrants outstanding have been
excluded from common stock equivalents because their effect would be
anti-dilutive.
9. Stock-based compensation:
The Company accounts for compensation costs associated with stock options
issued to employees under the provisions of Accounting Principles Board
Opinion No. 25 ("APB 25") whereby compensation is recognized to the extent
the market price of the underlying stock at the date of grant exceeds the
exercise price of the option granted. Stock-based compensation to
non-employees is accounted for using the fair-value based method prescribed
by Financial Accounting Standard No. 123 ("FAS 123").
14
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
9. Stock-based compensation (continued):
During the six months ended June 30, 2003, the Company issued 60,000 shares
of common stock options to an employee as compensation for services. In
accordance with APB 23, there was no stock-based compensation expense
recognized in conjunction with these common stock options. These options
fully vested upon issuance but are subject to stockholder approval.
During the six months ended June 30, 2003, the Company issued 45,000 shares
of common stock options to a consultant and an aggregate 20,000 shares of
common stock options to two members of the Company's Scientific Advisory
Board as compensation for services. The common stock options, which vest
over three years, were valued based upon the trading market prices on the
dates of issuance, or $61,443 and $13,914, respectively.
The Company used the Black-Scholes options-pricing model to determine the
fair value of each option grant as of the date of grant for consulting
expense incurred and for the purpose of the following pro forma
presentation. The following assumptions were used for grants in 2003: No
dividend yield, expected volatility of 73%; risk-free interest rates of
2.62% and 3.62% and expected lives of 10 years. The share price on the date
of grant for the 2003 grants range between $1.85 and $2.18 and the exercise
price of the grants range between $1.63 and $5.50.
10. Treasury stock:
During the second quarter of 2003, the Company, as authorized by the Board
of Directors, repurchased 100,000 shares of the Company's common stock with
a per share price between $2.80 and $3.20 for a total cost of $303,894.
11. National Institutes of Health Grant:
In 2001, the National Institutes of Health ("NIH") awarded the Company a
Small Business Innovation Research Grant (the "SBIR"), which will be
utilized in research and development efforts. NIH formally awarded the
Company a 2003 grant of $989,352, a 2002 grant of $814,398 and a 2001 grant
of $883,972. Therefore, the Company expects to receive a total of
approximately $2.7 million related to its initial application for the grant
through June 2004. The initial application was for approximately $3.0
million. However, due to the expected purchase of certain materials from
sources outside the United States, the expected funding was accordingly
reduced since the SBIR requires that materials be purchased from U.S.
suppliers.
15
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
11. National Institutes of Health Grant (continued):
The grant is subject to provisions for monitoring set forth in NIH Guide
for Grants and Contracts dated February 24, 2000, specifically, the NIAID
Policy on Monitoring Grants Supporting Clinical Trials and Studies. If NIH
believes that satisfactory progress is not achieved, the 2003 amount noted
above may be reduced or eliminated. The Company incurred approximately
$279,000 and $458,000 of costs related to this agreement for the six months
ended June 30, 2003 and 2002, respectively.
During the six month period ended June 30, 2003 and 2002, the Company
received $444,000 and $189,000, respectively, and recognized revenue of
$444,000 and $442,000, respectively, from this grant. The grant provided
for reimbursement of or advances for future research and development
efforts. Upon receiving funding under the grant and utilizing the funds as
specified, no amounts are refundable.
In addition, in August of 2002, the NIH awarded a second grant for $600,000
over two years. The second grant is expected to begin funding in the fourth
quarter of 2003.
12. Related party transactions:
The Company entered into a licensing agreement with a company that is also
a shareholder. The agreement included an up-front non-refundable payment of
$2 million in license fee revenue, which the Company deferred and is
recognizing monthly from January through October 2003 (the period of the
related research and development commitment). The agreement also provides
for milestone payments. During the six months ended June 30, 2003, the
Company recognized $1,200,000 in license fee revenue from this related
party.
16
ITEM 2. Management's Discussion and Analysis of Financial Condition and Plan of
Operations
The following discussion and analysis should be read in conjunction with the
Condensed Consolidated Financial Statements and Notes thereto included elsewhere
in this Form 10-QSB. This discussion contains certain forward-looking statements
that involve risks and uncertainties. The Company's actual results and the
timing of certain events could differ materially from those discussed in these
forward-looking statements as a result of certain factors, including, but not
limited to, those set forth herein and elsewhere in this Form 10-QSB.
For the Six Months Ended June 30, 2003 Compared to the Six Months Ended June 30,
2002
Sponsored Research Revenue. During the six-month period ended June 30, 2003, we
reported $510,250 of sponsored research revenues. Of this amount, $444,000 was
from a grant from the National Institutes of Health, and $56,250 was from a
collaborative research agreement. In the prior year, all revenue aggregating
$457,972 was derived from the grant.
License Fee Revenues. During December 2002, the Company entered into a licensing
agreement with a company (which is a shareholder), which included an up-front
non-refundable payment of $2 million, which was received in January 2003. The
Company is recognizing it over the period of the related research and
development commitment ($1,200,000 for the six months ended June 30, 2003). The
agreement also provides for milestone payments.
Research and Development. Research and development expenses of approximately
$1,286,000 and $910,000 were incurred during the six-month periods ended June
30, 2003 and 2002, respectively. Research and development expenses generally
include: salaries for key scientific personnel, research supplies, facility
rent, lab equipment depreciation, a portion of overhead operating expenses and
other costs directly related to the development and application of the
Bioral(TM) cochleate drug delivery technology.
General and Administrative Expense. General and administrative expenses of
approximately $1,358,000 and $401,000 were incurred in the six-month periods
ended June 30, 2003 and 2002, respectively. These expenses are principally
comprised of legal and professional fees, patent costs, and other costs
including office supplies, conferences, travel costs, salaries, website update
and development, and other business development costs. Furthermore, 2003
expenses include approximately $260,000 related to BND operating activities that
commenced in 2003, $148,000 of which related to offering costs associated with a
registration statement.
Interest Income (Expense). Interest income (expense) for the periods ended June
30, 2003 and 2002 was principally comprised of earnings from invested cash
offset by interest expense on the line of credit, notes payable and capital
leases payable.
17
Income Taxes. While net operating losses were generated during the six month
period ended June 30, 2003, we did not recognize any benefit associated with
these losses, as all related deferred tax assets have been fully reserved.
Financial Accounting Standards Board Statement No. 109 provides for the
recognition of deferred tax assets if realization of such assets is more likely
than not. Based upon available data, which includes our historical operating
performance and our reported cumulative net losses in prior years, we have
provided a full valuation allowance against our net deferred tax assets as the
future realization of the tax benefit is not sufficiently assured.
Other comprehensive loss Other comprehensive loss consists exclusively of
unrealized losses on marketable equity securities classified as available for
sale. These securities were purchased in the first quarter of 2003.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily from the sale of our
securities. From inception through June 30, 2003, we raised approximately $10.4
million, net of issuance costs, through these issuances. At December 31, 2002,
we had cash and cash equivalents totaling approximately $5,200,000. At June 30,
2003, we had $4,995,000 cash and cash equivalents. The operations of BioDelivery
Sciences, Inc., prior to our acquisition of a controlling interest on October
10, 2000, were financed primarily through funded research agreements. In 2001,
the National Institutes of Health awarded to us a three-year Small Business
Innovation Research Grant (SBIR), to be utilized in our research and development
efforts.
The NIH award consisted of a 2001 grant of $883,972 (of which we recognized
approximately 50% in 2001 and the remainder in 2002) and a 2002 grant of
$814,398 (of which $370,000 was recognized in 2002, with the balance recognized
through June 30, 2003). Additionally, the Company was awarded $989,000 as the
final year segment of the three year SBIR award. We expect to receive a total of
approximately $2.7 million related to all NIH grants through June 2004. The
grants are subject to provisions for monitoring set forth in NIH Guide for
Grants and Contracts dated February 24, 2000, specifically, the NIAID Policy on
Monitoring Grants Supporting Clinical Trials and Studies. If NIH believes that
satisfactory progress is not achieved, the 2003 amount noted above may be
reduced or eliminated.
18
In April 2003, we entered into a $1 million bank line of credit agreement, which
will be converted to a four year term loan, with a 75% loan to value ratio, at
an interest rate of 7.5%, to be used in the purchase of laboratory and other
equipment and facilities improvements in our Newark, New Jersey lab. The
collateral is all equipment owned by us. The initial draw of $650,000 covered
our expenditures in the fourth quarter of 2002 of approximately $325,000 and in
the first quarter of 2003 of $322,000. The balance was funded in July 2003.
Working capital was $3.9 million and $4.8 million at June 30, 2003 and December
31, 2002, respectively. At June 30, 2002, the working capital was $6.6 million.
From our inception through June 30, 2003, we have incurred approximately $4.8
million of research and development expenses. Additionally, during the period
March 28, 1995 (date of BioDelivery Sciences, Inc.'s incorporation) through the
acquisition of a controlling interest in BioDelivery Sciences, Inc. in October
2000, we incurred approximately $6.8 million of research and development
expenses.
We have incurred significant net losses and negative cash flows from operations
since our inception. As of June 30, 2003, we had an accumulated deficit of $9.1
million and total stockholders' equity of $4.6 million. At June 30, 2002, our
accumulated deficit was $6.0 million and our stockholders' deficit was
approximately $7.2 million.
We anticipate that cash used in operations and our investment in facilities will
continue in the future as we research, develop, and, potentially, manufacture
our drugs. While we believe further application of our Bioral (TM) licensed
cochleate technology to other drugs will result in license agreements with
manufacturers of generic and over-the-counter drugs, our plan of operations in
the next 18 months is focused on our further development of the Bioral(TM)
cochleate technology itself and its use in a limited number of applications.
Such plans do not include the marketing, production or sale of FDA approved
products.
We believe that our existing cash and cash equivalents, together with available
financing will be sufficient to finance our planned operations and capital
expenditures through at least the next 18 to 24 months. We may consume available
resources more rapidly than currently anticipated, resulting in the need for
additional funding. Accordingly, we may be required to raise additional capital
through a variety of sources, including:
o the public equity market;
o private equity financing;
o collaborative arrangements;
o grants;
o public or private debt; and
o redemption and exercise of warrants
o Sale of rights to BND, LLC
19
There can be no assurance that additional capital will be available on favorable
terms, if at all. If adequate funds are not available, we may be required to
significantly reduce or refocus our operations or to obtain funds through
arrangements that may require us to relinquish rights to certain of our drugs,
technologies or potential markets, either of which could have a material adverse
effect on our business, financial condition and results of operations. To the
extent that additional capital is raised through the sale of equity or
convertible debt securities, the issuance of such securities would result in
ownership dilution to our existing stockholders.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
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. We believe that the following are some of the
more critical judgment areas in the application of our accounting policies that
affect our financial condition and results of operations. We have discussed the
application of these critical accounting policies with our Board of Directors
and its Audit Committee.
Revenue recognition:
Sponsored research amounts are recognized as revenue, when the research
underlying such payments has been performed or when the funds have otherwise
been utilized, such as for the purchase of operating assets. Revenue is
recognized to the extent provided for under the related grant or collaborative
research agreement.
Non-refundable license fees are generally up-front payments for the initial
license of and access to the Company's technology. For nonrefundable license
fees received at the initiation of license agreements for which the Company has
an ongoing research and development commitment, the Company defers these fees
and recognizes them ratably over the period of the related research and
development. For nonrefundable license fees received under license agreements
where the continued performance of future research and development services is
not required, the Company recognizes revenue upon delivery of the technology. In
addition to license fees, the Company may also generate revenue from time to
time in the form of milestone payments. Milestone payments are only received and
recognized as revenues if the specified milestone is achieved and accepted by
the customer and continued performance of future research and development
services related to that milestone are not required.
20
Stock based compensation:
The Company follows Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation (SFAS 123), which establishes a fair
value based method of accounting for stock-based employee compensation plans;
however, the Company has elected to account for its employee stock compensation
plans using the intrinsic value method under Accounting Principles Board Opinion
No. 25 with pro forma disclosures of net earnings and earnings per share, as if
the fair value based method of accounting defined in SFAS 123 had been applied.
Had compensation cost for the Company's stock option plan been determined on the
fair value at the grant dates for stock-based employee compensation arrangements
consistent with the method required by SFAS 123, the Company's net loss and net
loss per common share would have been the pro forma amounts indicated in Note 2
to the financial statements.
Recent accounting pronouncements:
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. The statement amends and
clarifies accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. This
statement is designed to improve financial reporting such that contracts with
comparable characteristics are accounted for similarly. The statement, which is
generally effective for contracts entered into or modified after June 30, 2003,
is not anticipated to have a significant effect on the Company's financial
position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. The Company currently has no such
financial instruments outstanding or under consideration and therefore adoption
of this standard currently has no financial reporting implications.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Valuable Interest Entities. This interpretation clarifies rules relating to
consolidation where entities are controlled by means other than a majority
voting interest and instances in which equity investors do not bear the residual
economic risks. This interpretation is effective immediately for variable
interest entities created after January 31, 2003 and for interim periods
beginning after June 15, 2003 for interests acquired prior to February 1, 2003.
The Company currently has no ownership in variable interest entities and
therefore adoption of this standard currently has no financial reporting
implications.
21
ITEM 3. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer (collectively,
the "Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures for the Company. Such officers have concluded
(based on their evaluation of these controls and procedures as of the end of the
period covered by this report) that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in this report is accumulated and communicated to the Company's
management, including its principal executive officers as appropriate, to allow
timely decisions regarding required disclosures.
The Certifying Officers also have indicated that there were no significant
changes in the Company's internal controls or other factors that could
significantly affect such controls subsequent to the date of their evaluation.
Prior to its dismissal on April 18, 2003, the Company's former independent
auditor, Grant Thornton LLP ("GT"), advised the Audit Committee of the Company's
board of directors and the Company's management that GT noted a lack of
segregation of accounting and financial reporting duties as a result of the
Company's small size, which condition GT considered to be reportable under
standards established by the American Institute of Certified Public Accountants.
The Company believes this matter is not reportable under Regulation S-B since,
among other factors, the noted issue did not preclude the Company from
developing reliable financial statements as contemplated by Item
304(a)(1)(iv)(B)(1) of Regulation S-B. In its Current Report on Form 8-K, as
amended July 3, 2003, wherein the Company announced the dismissal of GT, the
Company voluntarily made the disclosure of GT's notations as an accommodation to
its former independent auditor. The Company has taken GT's notation under
advisement but believes its internal accounting controls are sufficient in order
to allow the Company to develop reliable financial statements. The Company will
continue to monitor and assess the costs and benefits of additional staffing in
the accounting area in conjunction with its newly appointed independent
accountants and has authorized GT to respond fully to the inquiries of these
accountants concerning this matter.
22
NOTE ON FORWARD-LOOKING STATEMENTS
The information set forth in this Report on Form 10-QSB under the Sections
"Management's Discussion and Analysis or Plan of Operation", "Management's plans
regarding liquidity and capital resources" and elsewhere relate to future events
and expectations and as such constitute "Forward-Looking Statement" within the
meaning of the Private Securities Litigation Act of 1995. The words "believes,"
"anticipates," "plans," "expects," and similar expressions in this report are
intended to identify forward-looking statements. Such forward-looking statements
involve known and unknown risks, uncertainties, and other factors which may
cause the actual results, performance or achievements of the Company to
materially differ from any future results, performance, or achievements
expressed or implied by such forward-looking statements and to vary
significantly from reporting period to reporting period. Such factors include,
among others, those listed under Item 1 of the Form 10-KSB and other factors
detailed from time to time in the Company's other filings with the Securities
and Exchange Commission. Although management believes that the assumptions made
and expectations reflected in the forward-looking statements are reasonable,
there is no assurance that the underlying assumptions will, in fact, prove to be
correct or that actual future results will not be different from the
expectations expressed in this report.
23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company may, from time to time, be involved in actual or potential legal
proceedings that the Company considers to be in the normal course of business.
The Company does not believe that any of these proceedings will have a material
adverse effect on its business.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Index
Number Description
------ -----------
10.31 First Amendment to Limited Liability Company Operating
Agreement of Bioral Nutrient Delivery, dated March 31,
2003.
10.32 Sub-License Agreement, dated effective April 1, 2003, by
and between BioDelivery Sciences International, Inc. and
Bioral Nutrient Delivery, LLC
10.33 Management Services and Administrative Agreement, dated
effective April 1, 2003, by and between BioDelivery
Sciences International, Inc. and Bioral Nutrient Delivery,
LLC
10.34 Distribution Agent Agreement, effective June 1, 2003, by
and between Kashner Davidson Securities Corporation and
Bioral Nutrient Delivery, LLC
31.1 Certification Pursuant To Sarbanes-Oxley Section 302
31.2 Certification Pursuant To Sarbanes-Oxley Section 302
32.1 Certification Pursuant To 18 U.S.C. Section 1350 (*)
32.2 Certification Pursuant To 18 U.S.C. Section 1350 (*)
* A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
(b) Reports on Form 8-K
On July 3, 2003, the Company filed an amended report on Form 8-K
regarding a change in the Company's certifying accountants.
On April 25, 2003 the Company filed a report on Form 8-K regarding a
change in the Company's certifying accountants.
On April 1, 2003, the Company filed a report on Form 8-K regarding its
Annual Report on Form 10-K and certain matters contained therein.
24
SIGNATURES
Pursuant to the requirements of the Exchange Act, the small business issuer
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BIODELIVERY SCIENCES INTERNATIONAL, INC.
Date: August 14, 2003 By: /s/ Francis E. O'Donnell, Jr.
----------------------------------------
Francis E. O'Donnell, Jr., President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2003 By: /s/ James A. McNulty
--------------------------------------------
James A. McNulty, Secretary, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
S-1