UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 November 3, 2003.
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 September 30, 2003 (unaudited)
and December 31, 2002.........................................................2
Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 2003 and 2002 (unaudited)..........................3
Condensed Consolidated Statement of Stockholders' Equity for the nine months
ended September 30, 2003 (unaudited)..........................................4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2003 and 2002 (unaudited).......................................5
Condensed Consolidated Statements of Comprehensive Loss for the nine months
ended September 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................16
Item 3. Controls and Procedures..................................................21
Part II. Other Information
Item 1. Legal Proceedings........................................................23
Item 6. Exhibits and Reports on Form 8-K.........................................23
Signatures........................................................................S-1
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
ASSETS
September 30,
2003 December 31,
(unaudited) 2002
------------ ------------
Current assets:
Cash and cash equivalents $ 1,158,926 $ 5,207,303
Marketable equity securities 550,562 --
Investments in certificates of deposit 1,922,978 --
Accounts receivable -- 2,000,000
Prepaid expenses and other current assets 261,769 201,518
------------ ------------
Total current assets 3,894,235 7,408,821
Equipment, net 1,078,892 435,061
Licenses, net 491,572 517,445
Other assets 27,429 28,855
------------ ------------
Total assets $ 5,592,128 $ 8,390,182
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of note payable, bank $ 203,498 $ --
Accounts payable and accrued liabilities 191,954 538,010
Due to related parties -- 51,725
Deferred revenue 200,000 2,000,000
Current maturities of capital lease obligation 7,934 12,775
------------ ------------
Total current liabilities 603,386 2,602,510
Capital lease obligation, less current maturities -- 4,742
Note payable, bank, less current maturities 796,502 --
Stockholders' equity:
preferred stock, $.001 par value, 20,000,000 shares
authorized, no shares issued or 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 13,943,041 13,956,327
Treasury stock, at cost, 100,000 shares (303,894) --
Accumulated deficit (9,547,868) (8,180,483)
Accumulated other comprehensive loss (6,125) --
------------ ------------
Total stockholders' equity 4,092,240 5,782,930
------------ ------------
Total liabilities and stockholders' equity $ 5,592,128 $ 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 NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- -----------------------------------
2003 2002 2003 2002
----------------- ------------------ --------------- -----------------
Sponsored research revenues $ 179,617 $ 148,000 $ 689,867 $ 605,972
License fees, related party 600,000 - 1,800,000 -
----------------- ------------------ --------------- -----------------
779,617 148,000 2,489,867 605,972
----------------- ------------------ --------------- -----------------
Expenses:
Research and development 700,027 519,202 1,986,194 1,428,755
General and administrative 552,994 544,210 1,887,369 945,016
Stock-based compensation 13,492 526,318 36,714 526,318
----------------- ------------------ --------------- -----------------
Total expenses 1,266,513 1,589,730 3,910,277 2,900,089
----------------- ------------------ --------------- -----------------
Interest income (expense), net ( 1,452) 28,359 53,025 ( 7,404)
----------------- ------------------ --------------- ----------------
Loss before income taxes ( 488,348) ( 1,413,371) ( 1,367,385) ( 2,301,521)
Income tax benefit (expense) - - - 54,964
----------------- ------------------ --------------- -----------------
Net loss ($ 488,348) ($ 1,413,371) ($ 1,367,385) ($ 2,246,557)
================ ================= ============== ================
Net loss per common share:
Basic and diluted ($ .07) ($ .20) ($ .19) ($ .39)
================ ================= ============== ================
Weighted average common
shares outstanding basic
and diluted 6,985,863 7,044,286 7,027,064 5,711,467
================= ================== =============== =================
The accompanying notes are an integral part of these financial statements.
3
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(Unaudited)
Accumulated Total
Preferred Stock Common Stock Additional Other Stock-
---------------- --------------------- Paid-In Treasury Accumulated Comprehensive holders'
Shares Amount Shares Amount Capital Stock Deficit Income Equity
------ -------- ---------- -------- ------------ ---------- ------------ --------- -----------
Balances at
December 31, 2002 -- $ -- 7,085,863 $ 7,086 $13,956,327 $ -- $ (8,180,483) $ -- $ 5,782,930
Issuance of common
stock options -- -- -- -- 36,714 -- -- -- 36,714
Unrealized loss on marketable
equity securities -- -- -- -- -- -- -- (6,125) (6,125)
Stock offering costs -- -- -- -- (50,000) -- -- -- (50,000)
Repurchase of treasury stock -- -- -- -- -- (303,894) -- -- (303,894)
Net loss for the period -- -- -- -- -- -- (1,367,385) -- (1,367,385)
------ -------- ---------- -------- ------------ ---------- ------------ --------- -----------
Balances at
September 30, 2003 -- $ -- 7,085,863 $ 7,086 $13,943,041 $ (303,894) $ (9,547,868) $ (6,125) $ 4,092,240
====== ======== ========== ======== ============ ========== ============ ========= ===========
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 NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
Nine Months Ended
September 30,
--------------------------
2003 2002
----------- -----------
Operating activities:
Net loss ($1,367,385) ($2,246,557)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 155,221 91,413
Stock-based compensation 36,714 321,054
Changes in assets and liabilities:
Accounts receivable 2,000,000 --
Grants receivable, prepaid expenses and
other current assets (110,251) (218,639)
Accounts payable and accrued liabilities (346,056) 116,744
Deferred revenue (1,800,000) (37,000)
----------- -----------
Net cash flows from operating activities (1,431,757) (1,972,985)
----------- -----------
Investing activities:
Purchase of equipment (771,753) (29,175)
Purchase of intangibles -- (39,884)
Purchase of marketable equity securities
and investments (2,479,665) --
----------- -----------
Net cash flows from investing activities (3,251,418) (69,059)
----------- -----------
Financing activities:
Issuance of common stock -- 8,990,487
Net change in short-term borrowings 1,000,000 (282,527)
Repurchase of treasury stock (303,894) --
Repayments of related party borrowings (51,725) (52,613)
Payments on notes and capital leases obligations (9,583) (305,457)
----------- -----------
Net cash flows from financing activities 634,798 8,349,890
----------- -----------
Net change in cash and cash equivalents (4,048,377) 6,307,846
Cash and cash equivalents at beginning of period 5,207,303 75,513
----------- -----------
Cash and cash equivalents at end of period $ 1,158,926 $ 6,383,359
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
------------------------------------------------
Non-cash investing and financing activities:
Unrealized losses on marketable equity securities $ 6,125 $ --
=========== ===========
Interest paid during the period $ 20,374 $ 7,404
=========== ===========
The accompanying notes are an integral part of these financial statements.
5
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net loss ($ 488,348) ($1,413,371) ($1,367,385) ($2,246,557)
Other comprehensive loss:
Unrealized gain (loss) on
Marketable equity securities 1,078 -- (6,125) --
----------- ----------- ----------- -----------
Comprehensive loss ($ 487,270) ($1,413,371) ($1,373,510) ($2,246,557)
=========== =========== =========== ===========
Note: Accumulated comprehensive loss consists exclusively of unrealized losses
on marketable equity securities.
The accompanying notes are an integral part of these financial statements.
6
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
1. Basis of presentation:
The condensed consolidated balance sheets of BioDelivery Sciences
International, Inc. and its majority-owned subsidiary, Bioral Nutrient
Delivery, LLC (collectively the "Company") as of September 30, 2003,
and the condensed consolidated statements of operations for the three
and nine months ended September 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 September 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 nine months ended September
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 consists of available for sale securities
(corporate bonds), which are recorded at fair value. Unrealized gains
and losses on these securities are recorded as other comprehensive loss
as a component of equity.
Investments:
Investments consist of certificates of deposit with an original
maturity in excess of 3 months and are recorded at cost.
7
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
2. Summary of significant accounting policies (continued):
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
pursuant to the research agreements.
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 NINE MONTHS ENDED SEPTEMBER 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.
September 30, September 30,
2003 2002
------------------ -----------------
Net loss, as reported ($ 1,367,385) ($ 2,246,557)
================== =================
Stock-based compensation, as reported $ 36,714 526,318
================== =================
Stock-based compensation under fair value
method $ 113,280 526,318
================== =================
Pro-forma net loss under fair value
method ($ 1,443,951) ($ 2,246,557)
================== =================
Net loss per share, as reported ($ .19) ($ .39)
================== =================
Pro-forma net loss per share under fair value
method ($ .21) ($ .39)
================== =================
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. The Company intends to grant 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 and for
personal care products. 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
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 deficit in minority interest has been recorded.
Upon the granting of the license, BND intends to identify licensees who
will 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 will seek to commercialize the delivery
technology through a combination of licensing programs to
manufacturing, marketing and distribution companies within these
industries.
9
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
3. Subsidiary corporate structure (continued):
BND has filed a registration statement on Form SB-2 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 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".
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
September 30, 2003.
Because the Company will receive no proceeds from the offering as these
rights are distributed as dividends, offering costs aggregating
$148,039 have been expensed in the accompanying statement of
operations. Total offering costs are estimated to be $275,000.
4. Liquidity and management's plans:
Since inception, the Company has financed its operations principally
from the sale of equity securities, through short-term and long-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, 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 August 2004, of which $1.7 million has
been received through September 30, 2003. The balance of approximately
$1,000,000 has been approved for funding through August 2004. The
Company was also awarded a second NIH grant in August 2002, for
$600,000 over 2 years. This grant is expected to commence funding in
the fourth quarter of 2003.
In the second quarter of 2003, the Company obtained a $1 million,
four-year term bank loan, which was used for the acquisition of
laboratory and other equipment and facilities improvements in the
Newark lab in the third quarter of 2003.
10
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
4. Liquidity and management's plans (continued):
We believe that our existing cash and short-term investments, together
with available financing, grants and new license revenue 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 and new license revenues;
o public or private debt; and
o redemption and exercise of warrants
5. Licenses:
Licenses consist of the following:
September 30, December 31,
2003 2002
--------------- -------------
Licensing costs $ 517,445 $ 517,445
Less accumulated amortization ( 25,873) -
--------------- -------------
$ 491,572 $ 517,445
=============== =============
Estimated aggregate future amortization expense for each of the next
five years is as follows:
Year ending September 30,
-------------------------
2004 $ 34,496
2005 34,496
2006 34,496
2007 34,496
2008 34,496
Thereafter 319,092
---------
$ 491,572
=========
11
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
6. Note payable, bank:
Note payable, bank consists of borrowings under a $1,000,000 four-year
term loan with interest only payable monthly at 7.5% through October
2003 and monthly interest and principal payments aggregating $24,179
thereafter, maturing October 2007. The note is secured by all equipment
of the Company.
The loan agreement contains various restrictive covenants, including a
minimum cash-to-liability ratio. The Company was in compliance with
these covenants as of September 30, 2003.
Year ending
September 30,
-------------
2004 $ 203,498
2005 238,497
2006 257,012
2007 276,964
2008 24,029
----------------
$ 1,000,000
less current maturities (203,498)
----------------
$ 796,502
================
12
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
7. 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 Nine Months Ended
September 30, September 30,
----------------------------------- ---------------------------------
2003 2002 2003 2002
--------------- ----------------- --------------- ---------------
Net loss - (numerator) ($ 488,348) ($ 1,413,371) ($ 1,367,385) ($ 2,246,557)
=============== ================= =============== ==============
Basic:
Weighted average shares
outstanding (denominator) 6,985,863 7,044,286 7,027,064 5,711,467
=============== ================= =============== ===============
Net loss per common
share - basic ($ .07) ($ .20) ($ .19) ($ .39)
=============== ================= =============== ===============
Diluted:
Weighted average shares
outstanding 6,985,863 7,044,286 7,027,064 5,711,467
Effect of dilutive securities - - - -
--------------- ----------------- --------------- ---------------
Adjusted weighted average
shares (denominator) 6,985,863 7,044,286 7,027,064 5,711,467
=============== ================= =============== ===============
Net loss per common
share - diluted ($ .07) ($ .20) ($ .19) ($ .39)
=============== ================= =============== ===============
The effects of all stock options and warrants outstanding have been
excluded from common stock equivalents because their effect would be
anti-dilutive.
8. Stock-based compensation:
During the nine months ended September 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.
During the nine months ended September 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.
13
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
9. Stock-based compensation (continued):
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
prices on the date of grant for the 2003 grants range between $1.85 and
$2.18. The exercise prices of the grants for all outstanding options
range between $1.63 and $5.50.
9. 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.
10. 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 $989,000, a 2002 grant of $814,000 and a 2001
grant of $884,000. Therefore, the Company expects to receive a total of
approximately $2.7 million related to its initial application for the
grant through August 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.
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. The Company incurred approximately $379,000 and $510,000 of
costs related to this agreement for the nine months ended September 30,
2003 and 2002, respectively.
During the nine month period ended September 30, 2003 and 2002, the
Company received and recognized $600,844 and $606,000, respectively,
from this grant. The grant provides 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.
14
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
10. National Institutes of Health Grant (continued):
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.
11. Related party transactions:
During 2003, the Company entered into a licensing agreement with a
company that is also a shareholder. The agreement included an up-front
non-refundable payment to the Company 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 nine months ended September 30, 2003, the Company
recognized $1,800,000 in license fee revenue from this related party.
15
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 Nine Months Ended September 30, 2003 Compared to the Nine Months Ended
September 30, 2002
Sponsored Research Revenue. During the nine month period ended September 30,
2003, we reported $689,867 of sponsored research revenues. Of this amount,
$623,617 was from a grant from the National Institutes of Health, and $66,250
was from a collaborative research agreement. In the prior year, all revenue
aggregating $605,972 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 to the Company, which was received in
January 2003. The Company is recognizing it over the period of the related
research and development commitment ($1,800,000 for the nine months ended
September 30, 2003). The agreement also provides for milestone payments.
Research and Development. Research and development expenses of $1,986,194 and
$1,428,755 were incurred during the nine month periods ended September 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
$1,887,369 and $945,016 were incurred in the nine month periods ended September
30, 2003 and 2002, respectively. These expenses are principally composed 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 $388,000 related to BND operating activities that commenced in
2003, approximately $150,000, of which, related to offering costs associated
with a registration statement. Furthermore, on February 13, 2003, we made an
unsecured loan to us in the amount of $500,000 to fund our formation expenses
and working capital requirements. This loan accrues interest at a rate of 4.85%
annually and will be paid back solely from 10% of any royalty revenue that may
be received by BND, in preference to the holders of our Class B Shares.
16
Stock-Based Compensation Expense. Stock-based compensation expense of $36,714
and $526,318 were incurred in the nine month periods ended September 30, 2003
and 2002, respectively. The reduction results principally from non-recurring
items in 2002 associated with the Company's forgiveness of employee stock
subscription notes receivable and related income taxes paid on behalf of such
employees.
Interest Income (Expense). Interest income (expense) for the periods ended
September 30, 2003 and 2002 was principally composed of earnings from invested
cash offset by interest expense on the line of credit, notes payable and capital
leases payable.
Income Taxes. While net operating losses were generated during the nine month
period ended September 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 September 30, 2003, we raised approximately
$10,400,000 million, net of costs, through these issuances. At December 31,
2002, we had cash and cash equivalents totaling approximately $5,200,000. At
September 30, 2003, we had approximately $3,600,000 in cash and short-term
investments.
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 2001 and 2002 grants aggregating approximately
$1,700,000, $445,000 of which has been recognized as revenue in 2003.
Additionally, in July 2003 the Company was awarded $989,000 as the final year
segment of the three year SBIR award. 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.
17
In the third quarter of 2003, we obtained a $1 million bank term loan, at an
interest rate of 7.5%, used to acquire laboratory and other equipment and
facilities improvements in our Newark, New Jersey lab. The collateral is all
equipment owned by us.
Working capital was $3.3 million and $4.8 million at September 30, 2003 and
December 31, 2002, respectively. At September 30, 2002, the working capital was
$5.8 million.
From our inception through September 30, 2003, we have incurred approximately
$5.5 million of research and development expenses. Additionally, during the
period March 28, 1995 (date of BioDelivery Sciences, Inc.'s incorporation, our
predecessor entity), 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 September 30, 2003, we had an accumulated deficit of
$9.5 million and total stockholders' equity of $4.1 million. At September 30,
2002, our accumulated deficit was $7.4 million and our stockholders' equity was
approximately $6.5 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) 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 short-term investments, together with
available financing, grants and new licensing revenues 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 and new license revenues;
o public or private debt; and
o redemption and exercise of warrants
18
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.
19
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.
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
20
with its newly appointed independent accountants and has authorized GT to
respond fully to the inquiries of these accountants concerning this matter.
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.
21
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
------ -----------
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.
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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: November 6, 2003 By: /s/ Francis E. O'Donnell, Jr.
------------------------------------------
Francis E. O'Donnell, Jr., President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 6, 2003 By: /s/ James A. McNulty
------------------------------------------
James A. McNulty, Secretary, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
S-1