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 March 31, 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 outstanding as of May
15, 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 March 31, 2003 (unaudited)
and December 31, 2002....................................................2
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2003 and 2002 (unaudited).........................3
Condensed Consolidated Statement of Stockholders' Equity for
the three months ended March 31, 2003 (unaudited)........................4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and 2002 (unaudited)................................5
Condensed Consolidated Statements of Comprehensive Loss for the
three months ended March 31, 2003 and 2002 (unaudited)...................6
Notes to Condensed Consolidated Financial Statements (unaudited)...........7
Item 2. Management's Discussion and Analysis or Plan of Operation...........14
Item 3. Controls and Procedures.............................................17
Part II. Other Information
Item 1. Legal Proceedings...................................................19
Item 6. Exhibits and Reports on Form 8-K....................................19
Signatures...................................................................S-1
Certifications
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2003 AND DECEMBER 31, 2002
ASSETS
March 31,
2003 December 31,
(unaudited) 2002
----------------- ------------------
Current assets:
Cash and cash equivalents $ 2,342,093 $ 5,207,303
Marketable equity securities, available for sale 3,389,190 -
Accounts receivable 5,039 2,000,000
Prepaid expenses and other assets 202,129 201,518
----------------- ------------------
Total current assets 5,938,451 7,408,821
Equipment, net 694,188 435,061
Licenses 508,821 517,445
Other assets, net 28,379 28,855
----------------- ------------------
Total assets $ 7,169,839 $ 8,390,182
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 612,450 $ 538,010
Due to related parties - 51,725
Deferred revenue 1,433,125 2,000,000
Current maturities of capital lease payable 14,321 12,775
----------------- ------------------
Total current liabilities 2,059,896 2,602,510
Capital lease payable, less current maturities - 4,742
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 and 5,770,677 shares issued
and outstanding in 2003 and 2002, respectively 7,086 7,086
Additional paid-in capital 13,966,057 13,956,327
Accumulated deficit ( 8,752,390) ( 8,180,483)
Accumulated other comprehensive loss ( 110,810) -
----------------- ------------------
Total stockholders' equity 5,109,943 5,782,930
----------------- ------------------
Total liabilities and stockholders' equity $ 7,169,839 $ 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 MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
Three Months Ended
March 31,
-----------------------------------
2003 2002
------------------ ---------------
Sponsored research revenues $ 255,125 $ 275,000
License fees 600,000 -
----------------- ---------------
855,125 275,000
----------------- --------------
Expenses:
Research and development 643,495 450,475
General and administrative 814,020 205,768
------------------ ---------------
Total expenses 1,457,515 656,243
----------------- --------------
Interest income (expense), net 30,483 ( 9,814)
------------------ ---------------
Loss before income taxes ( 571,907) ( 391,057)
Income tax benefit - 95,843
------------------ ---------------
Net loss ($ 571,907) ($ 295,214)
================== ===============
Net loss per common share:
Basic and diluted ($ .08) ($ .06)
================== ===============
Weighted average common stock shares
outstanding - basic and diluted 7,085,863 5,000,863
================== ===============
The accompanying notes are an integral part of these financial statements.
3
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(Unaudited)
Accumulated Total
Preferred Stock Common Stock Additional Other Stockholders'
--------------------- ------------------------ Paid-In Accumulated Comprehensive Equity
Shares Amount Shares Amount Capital Deficit Income (Deficit)
--------- ---------- ----------- ----------- ------------ ------------- ------------ ------------
Balance, December 31, 2002 - $ - 7,085,863 $ 7,086 $ 13,956,327 ($ 8,180,483) $ - $5,782,930
Issuance of common stock
options - - - - 9,730 - - 9,730
Unrealized loss on
marketable equity
securities - - - - - - ( 110,810) ( 110,810)
Net loss - - - - - ( 571,907) - ( 571,907)
--------- ---------- ----------- ----------- ------------ ------------ ------------ -------------
Balance, March 31, 2003
(unaudited) - $ - 7,085,863 $ 7,086 $ 13,966,057 ($ 8,752,390) ($ 110,810) $5,109,943
========= ========== =========== =========== ============ ============= ============ ===========
The accompanying notes are an integral part of these financial statements.
4
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
Three Months Ended
March 31,
-----------------------------------
2003 2002
------------------ ---------------
Operating activities:
Net loss ($ 571,907) ($ 295,214)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 71,638 40,358
Stock-based compensation 9,730 -
Changes in assets and liabilities:
Accounts receivable 1,994,961 -
Prepaid expenses and other assets ( 611) ( 135,869)
Other assets - ( 232,682)
Accounts payable and accrued liabilities 74,440 271,459
Deferred revenue ( 566,875) ( 37,000)
------------------ ---------------
Net cash flows from operating activities 1,011,376 ( 388,948)
Investing activities:
Purchase of equipment ( 321,665) -
Purchase of marketable equity securities ( 3,500,000) -
------------------ ---------------
Net cash flows from investing activities ( 3,821,665) -
Financing activities:
Issuance of Common Stock - 336,205
(Payments on) borrowings from related parties ( 51,725) 32,277
Payment on notes and capital leases payable ( 3,196) ( 55,047)
----------------- ---------------
Net cash flows from financing activities ( 54,921) 313,435
Net change in cash and cash equivalents ( 2,865,210) ( 75,513)
Cash and cash equivalents at beginning of period 5,207,303 75,513
------------------ ---------------
Cash and cash equivalents at end of period $ 2,342,093 $ -
================== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
------------------------------------------------
Non-cash investing and financing activities:
Unrealized losses on marketable equity securities $ 110,810 $ -
================== ===============
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 THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
2003 2002
----------- -----------
Net loss ($ 571,907) ($ 295,214)
Other comprehensive loss:
Unrealized loss on marketable equity securities ( 110,810) -
----------- -----------
Comprehensive loss ($ 682,717) ($ 295,214)
=========== ===========
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 THREE MONTHS ENDED MARCH 31, 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 March 31, 2003, and the
condensed consolidated statements of operations for the three months ended
March 31, 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 March 31, 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 months ended March 31, 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 income as a
component of equity.
Revenue recognition:
License fee revenue is recognized over the life of the respective
agreements.
7
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
3. 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. 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 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.
In February 2003, BND filed a registration statement with the SEC to
distribute as a dividend to the Company's stockholders an aggregate of
3,545,431 rights to purchase a corresponding number of Class B Membership
Shares, which rights are exercisable for $0.01. Such registration statement
has not been approved by the SEC as of the date of this report, is in the
midst of the registration process and there can be no assurances given that
the registration statement will be declared effective or that the
distribution of rights will be effected.
8
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
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, 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 June 2004, of which $1,475,972 has
been received through March 31, 2003. It was also awarded a second NIH
grant in August 2002, for $600,000 over 2 years.
In the first quarter of 2003, the Company received a commitment for a $1
million bank line of credit, to 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
the Newark lab. The collateral will be all equipment owned. The loan was
closed in April, 2003 with an initial draw of $650,000, which covered
expenditures in the fourth quarter of 2002 of approximately $325,000 and in
the first quarter of 2003 of $322,000.
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
unitswith 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.
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.
9
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
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
$110,810 at March 31, 2003. Interest income is recorded on the accrual
basis. Dividends are recorded on the ex-dividend date.
6. Licenses:
Licenses consist of the following:
March 31, December 31,
2003 2002
--------------- ----------------
Licensing costs $ 517,445 $ 517,445
Less accumulated amortization ( 8,624) ( - )
--------------- ----------------
$ 508,821 $ 517,445
=============== ================
Estimated aggregate future amortization expense for each of the next five
years is as follows:
Year ending March 31,
---------------------
2004 $ 34,496
2005 34,496
2006 34,496
2007 34,496
2008 34,496
Thereafter 336,341
----------------
$ 508,821
================
10
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 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
March 31,
---------------------------------
2003 2002
--------------- ----------------
Net loss - (numerator) ($ 571,907) ($ 295,214)
============== ===============
Basic:
Weighted average shares outstanding (denominator) 7,085,863 5,000,863
=============== ================
Net loss per common share - basic ($ .08) ($ .06)
=============== ================
Diluted:
Weighted average shares outstanding 7,085,863 5,000,863
Effect of dilutive securities - -
--------------- ----------------
Adjusted weighted average shares (denominator) 7,085,863 5,000,863
=============== ================
Net loss per common share - diluted ($ .08) ($ .06)
=============== ================
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:
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").
During the three months ended March 31, 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.
11
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
8. Stock-based compensation (continued):
During the three months ended March 31, 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 or 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 $5.50.
The following table reflects supplemental financial information related to
stock-based employee compensation, as required by Statement of Financial
Accounting Standards No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION -
TRANSITION AND DISCLOSURE.
March 31, March 31,
2003 2002
----------------- ------------------
Net loss, as reported ($ 571,907) ($ 295,214)
================= ==================
Stock-based compensation, as reported $ 9,730 -
================= ==================
Stock-based compensation under fair value method $ 76,566 -
================= =================
Pro-forma net loss under fair value method ($ 648,473) ($ 295,214)
================ -=================
Net loss per share, as reported ($ .08) ($ .06)
================= ==================
Proforma net loss per share under fair value method ($ .09) ($ .06)
================= ==================
12
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
9. 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 has formally awarded the
Company a 2002 grant of $814,398 and a 2001 grant of $883,972.
Additionally, this award refers to funding levels of $989,352 that the
Company expects to be awarded in 2003, subject to availability and
satisfactory progress of the project. 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.
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
$126,000 and $260,000 of costs related to this agreement for the three
months ended March 31, 2003 and 2002, respectively.
During the three-month period ended March 31, 2003 and 2002, the Company
received $222,000 and $148,000, respectively, and recognized revenue of
$222,000 and $259,000, respectively, from this grant. As awarded on
September 19, 2001, 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 second
quarter of 2003.
13
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
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 Three Months Ended March 31, 2003 Compared to the Three Months Ended
March 31, 2002
Sponsored Research Revenue. During the three-month period ended March 31, 2003,
we reported $255,125 of sponsored research revenues. Of this amount , $222,000
was from a grant from the National Institutes of Health, and $33,125 was from a
collaborative research agreement. In the prior year, all revenue aggregating
$275,000 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 has deferred the revenue and will recognize it over the period of the
related research and development commitment. The agreement also provides for
milestone payments.
Research and Development. Research and development expenses of approximately
$643,000 and $450,000 were incurred during the three-month periods ended March
31, 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 $814,000 and $206,000 were incurred in the three-month periods
ended March 31, 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 $180,000 related to BND operating activities that
commenced in 2003.
Interest Income (Expense). Interest income (expense) for the periods ended March
31, 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.
14
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
Income Taxes. While net operating losses were generated during the three month
period ended March 31, 2003, we did not recognize any benefit associated with
these losses, as all related deferred tax assets have been fully reserved.
However, in March 2002, a new tax law changed the carryback period from two to
five years, which allowed us to carryback prior losses to 1996 and 1997,
resulting in a tax benefit of $95,843 in 2002. 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 held 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 March 31, 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 March 31,
2003, we had $5,731,000 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 to be
recognized through June 30, 2003). Additionally, this award refers to funding
levels of $989,000 we expect to be awarded in 2003, subject to availability and
satisfactory progress of the project. 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.
In the first quarter of 2003, we received a commitment for a $1 million bank
line of credit, to 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 lab.
The collateral will be all equipment owned by us. The loan was closed in April,
2003 with an initial draw of $650,000,
15
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
which covered our expenditures in the fourth quarter of 2002 of approximately
$325,000 and in the first quarter of 2003 of $322,000.
Working capital was $3,879,000 and $3,878,555 at March 31, 2003 and December 31,
2002, respectively. At March 31, 2002, the working capital deficit was
$1,698,000.
From our inception through March 31, 2003, we have incurred approximately $4.2
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., 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 March 31, 2003, we had an accumulated deficit of $8.7
million and total stockholders' equity of $5.1 million. At March 31, 2002, our
accumulated deficit was $5.4 million and our stockholders' deficit was
approximately $500,000.
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 cash equivalents, together with available
equipment financing and the net proceeds of the pending offering will be
sufficient to finance our planned operations and capital expenditures through at
least the next 12 to 18 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
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
16
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
convertible debt securities, the issuance of such securities would result in
ownership dilution to our existing stockholders.
During June 2002, our existing line-of-credit terminated and the balance was
repaid from the proceeds of our common stock offering.
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:
License fee revenue is recognized over the life of the respective
agreements.
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 a date within
90 days of the filing of 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,
and there were no corrective actions with regard to significant deficiencies and
material weaknesses.
17
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
Prior its dismissal on April 18, 2003, the Company's former independent auditor,
Grant Thornton LLP ("GT"), has 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, dated
April 25, 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.
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.
18
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
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
------ -----------
99.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 Of The Sarbanes-Oxley Act Of 2002(*)
99.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 Of The Sarbanes-Oxley Act Of 2002(*)
* 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 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.
On February 26, 2003, the Company filed a report on Form 8-K regarding
the formation of its subsidiary, Bioral Nutrient Delivery, LLC
On January 7, 2003, the Company filed a report on Form 8-K regarding
its license agreement with Pharmaceutical Product Development, Inc.
19
BIODELIVERY SCIENCES INTERNATIONAL, INC. AND SUBSIDAIRY
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
BIODELIVERY SCIENCES INTERNATIONAL, INC.
Date: May 15, 2003 By: /s/ Francis E. O'Donnell, Jr.
-----------------------------------------
Francis E. O'Donnell, Jr., President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2003 By: /s/ James A. McNulty
------------------------------------------
James A. McNulty, Secretary, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
S-1
CERTIFICATION
I, Francis E. O'Donnell, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of BioDelivery Sciences
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officer and I am responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and I have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us by
others, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on my
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors;
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Francis E. O'Donnell, Jr.
-----------------------------
Francis E. O'Donnell, Jr.
President and Chief Executive Officer
CERTIFICATION
I, James A. McNulty, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of BioDelivery Sciences
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and I have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us by
others, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors;
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003
/s/ James A. McNulty
--------------------------------------
James A. McNulty
Secretary, Treasurer and Chief Financial Officer