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, 2002
OR
[ ] 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.
(Name of small business issuer as specified in its charter)
Delaware 35-2089858
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
UMDNJ Medical School
185 South Orange Avenue, Bldg #4
Newark, NJ 07103
----------------
(Address of Principal Executive Offices) (Zip Code)
(813) 902-8980
--------------
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each Class
----------------------
Common Stock. $.001 Par Value
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes |X| No | |
The Issuer had 7,085,863 shares of common stock issued and outstanding
as of November 12, 2002.
BioDelivery Sciences International, Inc.
Form 10-QSB
Index
Part I. Financial Information Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2002 (unaudited)
and December 31, 2001........................................................................2
Condensed Consolidated Statements of Operations for the three months and
nine months ended September 30, 2002 and 2001 and the period
January 6, 1997 (date of incorporation) to September 30, 2002 (unaudited)....................3
Condensed Consolidated Statement of Stockholders' Equity (Deficit) for the nine months
ended September 30, 2002.....................................................................4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001, and the period January 6, 1997
(date of incorporation) to September 30, 2002 (unaudited)...................................5
Notes to Condensed Consolidated Financial Statements (unaudited)...............................6
Item 2. Management's Discussion and Analysis or Plan of Operation................................10
Item 3. Controls and Procedures..................................................................13
Part II. Other Information
Item 1. Legal Proceedings........................................................................14
Item 2. Changes in Securities....................................................................14
Item 6. Exhibits and Reports on Form 8-K.........................................................14
Signatures........................................................................................15
PART I. FINANCIAL INFORMATION
Item 1. - Financial Statements
BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A Development Stage Company)
Condensed Consolidated Balance Sheets - (Unaudited)
September 30, December 31,
2002 2001
--------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,383,359 $ 75,513
Grant receivable, prepaid expenses and other assets 330,323 111,684
--------------- ---------------
Total current assets 6,713,682 187,197
EQUIPMENT, net 173,424 233,562
INTANGIBLES, net 585,254 547,470
DEFERRED OFFERING COSTS - 365,340
--------------- ---------------
Total Assets $ 7,472,360 $ 1,333,569
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 931,023 $ 814,279
Due to related parties 21,718 74,331
Line of credit - 282,527
Deferred revenue - 37,000
Current portion of capital lease payable 12,265 14,804
Current portion of notes payable - 149,524
--------------- ---------------
Total current liabilities 965,006 1,372,465
CAPITAL LEASE PAYABLE, less current portion 16,708 18,369
NOTES PAYABLE, less current portion - 151,733
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY (DEFICIT):
preferred stock - -
Common stock 7,086 5,001
Additional paid-in capital 13,847,484 4,903,368
Deficit accumulated during development stage (7,363,924) (5,117,367)
--------------- ---------------
Total stockholders' equity (deficit) 6,490,646 (208,998)
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 7,472,360 $ 1,333,569
=============== ===============
The accompanying notes are an integral part of these financial statements.
2
BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A Development Stage Company)
Condensed Consolidated Statements of Operations (Unaudited)
Period From
January 6, 1997
Three Months Ended Nine Months Ended (Date of
September 30, September 30, Incorporation)
-------------------------- -------------------------- to September 30,
2002 2001 2002 2001 2002
----------- ----------- ----------- ----------- ----------------
Sponsored research revenues $ 148,000 $ 8,600 $ 605,972 $ 36,385 $ 1,140,357
Expenses:
Research and development 519,202 389,563 1,428,755 1,143,736 3,405,423
General and administrative:
General and administrative 544,210 174,568 945,016 869,980 2,548,838
Stock compensation 526,318 - 526,318 - 2,718,402
----------- ----------- ----------- ----------- ----------------
Total expenses 1,589,730 564,131 2,900,089 2,013,716 8,672,663
Interest income (expense), net 28,359 (8,033) (7,404) 7,527 (7,589)
----------- ----------- ----------- ----------- ----------------
Loss before income taxes and
minority interest (1,413,371) (563,564) (2,301,521) (1,969,804) (7,539,895)
Income tax benefit - - 54,964 - 73,499
----------- ----------- ----------- ----------- ----------------
Loss before minority interest (1,413,371) (563,564) (2,246,557) (1,969,804) (7,466,396)
Minority interest in net loss of
subsidiary - - - - 102,472
----------- ----------- ----------- ----------- ----------------
Net loss $(1,413,371) $ (563,564) $(2,246,557) $(1,969,804) $ (7,363,924)
=========== =========== =========== =========== ================
Net loss per common share:
Basic and diluted $ (.20) $ (.14) $ (.39) $ (.53)
=========== =========== =========== ===========
Weighted average common
stock shares outstanding -
basic and diluted 7,044,286 3,960,924 5,711,467 3,744,394
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
3
BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A Development Stage Company)
Condensed Consolidated Statement of Stockholders' Equity (Deficit)
Deficit
Accumulated Total
Preferred Stock Common Stock Additional During Stockholders'
--------------- ------------------------- Paid-In Development Equity
Shares Amount Shares Amount Capital Stage (Deficit)
------ ------ ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2001 - $ - 5,000,863 $ 5,001 $ 4,903,368 $(5,117,367) $ (208,998)
Shares issued for cash (unaudited) - - 2,085,000 2,085 8,623,062 - 8,625,147
Compensation expense related to forgiveness
of shareholder notes (unaudited) - - - - 321,054 - 321,054
Net loss (unaudited) - - - - - (2,246,557) (2,246,557)
------ ------ ----------- ----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 2002 (unaudited) - $ - 7,085,863 $ 7,086 $13,847,484 $(7,363,924) $ 6,490,646
====== ====== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of this financial statement.
4
BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows (Unaudited)
Period From
January 6, 1997
Nine Months Ended (Date of
September 30, Incorporation)
-------------------------- to September 30,
2002 2001 2002
----------- ----------- --------------
OPERATING ACTIVITIES:
Net loss $(2,246,557) $(1,969,804) $ (7,363,924)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 91,413 73,127 219,711
Loss applicable to minority interest - - (102,472)
Deferred revenue (37,000) - (56,000)
Litigation settlement - 300,000 425,000
Compensation expense 321,054 - 2,511,449
Changes in assets and liabilities:
Grants receivable, prepaid expenses and other assets (218,639) (93,159) (237,304)
Accounts payable and accrued liabilities 116,744 127,873 844,067
Due to/from related parties (52,613) 68,554 178,222
----------- ----------- --------------
Net cash used in operating activities (2,025,598) (1,493,409) (3,581,251)
INVESTING ACTIVITIES:
Net cash received with business combination - - 380,465
Purchase of equipment (29,175) - (114,037)
Purchase of intangibles (39,884) - (39,884)
Purchase of minority interest - (116,375) (116,375)
----------- ----------- --------------
Net cash provided by (used in) investing activities (69,059) (116,375) 110,169
FINANCING ACTIVITIES:
Issuance of Preferred Stock - - 1,010,000
Issuance of Common Stock, net of issuance costs 8,990,487 805,000 9,430,147
Net change in line of credit (282,527) 75,000 -
Payment on capital lease payable (4,200) (6,506) (10,706)
Payment on notes payable (301,257) (87,725) (575,000)
----------- ----------- --------------
Net cash provided by financing activities 8,402,503 785,769 9,854,441
NET CHANGE IN CASH 6,307,846 (824,015) 6,383,359
CASH AT BEGINNING OF PERIOD 75,513 950,939 -
----------- ----------- --------------
CASH AT END OF PERIOD $ 6,383,359 $ 126,924 $ 6,383,359
=========== =========== ==============
The accompanying notes are an integral part of these financial statements.
5
BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2002 and the Period From January 6, 1997
(date of incorporation) to September 30, 2002
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated balance sheets of BioDelivery Sciences International,
Inc. and its subsidiary (collectively "the Company") as of September 30, 2002,
and the condensed consolidated statements of operations for the three and nine
months ended September 30, 2002 and 2001 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, 2002 and for all
periods presented, have been made. The condensed consolidated balance sheet at
December 31, 2001, 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, 2001, included in the Company's 2001 Annual Report on Form
10-KSB filed with the SEC on April 1, 2002 ("2001 Annual Report").
The results of operations for the three and nine months ended September 30,
2002, are not necessarily indicative of results that may be expected for any
other interim period or for the full fiscal year.
In March 2002, the Company approved a one for 4.37 reverse stock split. The
financial statements have been restated to reflect the reverse stock split.
NOTE 2 - PLAN OF OPERATIONS
Since inception, the Company has financed its operations principally from the
sale of equity securities and through a line of credit. Historically, the
Company's subsidiary financed its operations principally from funded research
arrangements. The Company has not generated revenue from the sale of any product
or from any licensing arrangement since inception. The Company intends to
finance its research and development efforts and its working capital needs from
existing and new sources of financing, primarily licensing agreements. For
instance, in 2001 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 $1,031,972 has been received to date. It was
also awarded a second NIH grant in August 2002, for $600,000 over two years. In
September 2002, the Company completed its public offering, which consisted of
2,085,000 Units, each comprised of one share of common stock and one redeemable
Class A common stock purchase warrant. During the three months ended June 30,
2002, the Company sold 2,000,000 units at $5.25 per unit. During the three
months ended September 30, 2002, the Company sold 85,000 units at $5.25 per
unit. The Company intends to finance its research and development efforts and
its working capital needs through licensing and joint venture arrangements with
pharmaceutical companies, whose own proprietary pharmaceutical products may
benefit from delivery using our nanocochleate technology. Moreover,
6
BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2002 and the Period From January 6, 1997
(date of incorporation) to September 30, 2002
NOTE 2 - PLAN OF OPERATIONS - CONTINUED
there is the possibility of licensing income from applications of the Company's
technology to over-the-counter drugs, generics, nutraceuticals, processed foods
and beverages. To the extent that additional capital needs are required, the
Company may raise additional funding from other sources, including debt
financing and equity financing. While there can be no assurance that such
sources will provide adequate funding for the Company's operations, management
believes such sources will be available to the Company.
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS
142, Goodwill and Intangible Assets. SFAS 141 is effective for all business
combinations completed after June 30, 2001. SFAS 142 is effective for the year
beginning January 1, 2002; however certain provisions of that Statement apply to
goodwill and other intangible assets acquired between July 1, 2001, and the
effective date of SFAS 142. The Company determined that the adoption of SFAS 142
did not have any impact on the Company's financial statements.
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement applies to all entities. It
applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and/or the normal
operation of a long-lived asset, except for certain obligations of lessees. This
Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company is evaluating the impact of the
adoption of this standard and has not yet determined the effect of adoption on
its financial position and results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be disposed Of. The provisions of the statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001. The Company adopted this standard effective January 1, 2002,
which did not have a material impact on the Company's financial statements.
7
BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2002 and the Period From January 6, 1997
(date of incorporation) to September 30, 2002
NOTE 4 - NET LOSS PER COMMON SHARE
The following table reconciles the numerators and denominators of the basic and
diluted loss per share computations.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- -------------------------------
2002 2001 2002 2001
--------------- --------------- ---------------- -----------
Net loss - (numerator) $ (1,413,371) $ (563,564) $ (2,246,557) $(1,969,804)
=============== =============== ================ ===========
Basic:
Weighted average shares
outstanding (denominator) 7,044,286 3,960,924 5,711,467 3,744,394
=============== =============== ================ ===========
Net loss per common share -
basic $ (.20) $ (.14) $ (.39) $ (.53)
=============== =============== ================ ===========
Diluted:
Weighted average shares
outstanding 7,044,286 3,960,924 5,711,467 3,744,394
Effect of dilutive securities - - - -
--------------- --------------- ---------------- -----------
Adjusted weighted average
shares (denominator) 7,044,286 3,960,924 5,711,467 3,744,394
=============== =============== ================ ===========
Net loss per common share -
diluted $ (.20) $ (.14) $ (.39) $ (.53)
=============== =============== ================ ===========
The effects of all stock options and warrants outstanding have been excluded
from Common Stock equivalents because their effect would be anti-dilutive.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Company was the defendant in a lawsuit filed by Michael Pennessi d/b/a SSP
Consultants, who is not affiliated with the Company, arising out of an
introduction to BioDelivery Sciences, Inc. in 2000. A settlement for $75,000 in
cash payable to the plaintiff, was reached prior to September 30, 2002 and is
reflected in selling, general and administrative expense.
NOTE 6 - LINE OF CREDIT
At December 31, 2001, the Company had secured a revolving line of credit from a
financial institution, which had an interest rate of prime plus 2.0%. During the
six months ended June 30, 2002, the Company continued to draw on the line of
credit to fund operations. As of June 30, 2002, the line of credit terminated
and was satisfied in full with proceeds from the sale of common stock in our
public offering.
8
BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2002 and the Period From January 6, 1997
(date of incorporation) to September 30, 2002
Note 7 - NATIONAL Institutes of Health Grant
In 2001, the National Institutes of Health (NIH) awarded the Company a Small
Business Innovation Research Grant (SBIR), which has been and will be utilized
in research and development efforts. NIH awarded the Company a 2001 grant of
$883,972 and a 2002 grant of $814,398. 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. In addition, in August
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 2002.
During the nine-month period ended September 30, 2002, the Company recognized
revenue of approximately $606,000 from the initial 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.
As of September 30, 2002, the Company has recognized the full funding level of
$883,972 related to the 2001 award and $148,000 related to the 2002 award.
NOTE 8 - INCOME TAXES
In March 2002, a new tax law changed the carryback period from two to five
years. This allowed the Company to carryback its net operating losses to 1997,
which resulted in an additional benefit of $54,964. The Company initially
recognized a tax benefit of $95,843 during the three month period ended March
31, 2002 based on a preliminary evaluation of the new tax law. The Company
subsequently revised its estimate of recoverable income taxes, which resulted in
the reduction of income tax receivable by $40,879 during the three month period
ended September 30, 2002.
NOTE 9 - STOCK BASED COMPENSATION
Compensation expense of $526,318 is associated with the forgiveness of employee
stock subscription notes receivable and related income tax payable on behalf of
the employees. These notes were secured by common stock and were previously
included as a reduction of stockholders' equity. This is a non-recurring event
and no future costs are expected with regard to this stock based compensation
award that was initially granted in 1999.
9
BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A Development Stage Company)
Item 2. Management's Discussion and Analysis
or Plan of Operations
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.
The Company is a development-stage company and we expect to continue to perform
research and development activities in furtherance of our business strategy and
product development.
For the Nine Months Ended September 30, 2002 Compared to the Nine Months Ended
September 30, 2001
Sponsored Research Revenue. During the nine-month periods ended September 30,
2002 and 2001, we reported approximately $606,000 and $36,000, respectively, of
sponsored research revenues. With the exception of grants by the National
Institutes of Health and funding provided to us through various collaborative
agreements, we have not derived any revenues from our operations, technologies
or products.
Research and Development. Research and development expenses of approximately
$1.4 million and $1.1 million were incurred during the nine-month periods ended
September 30, 2002 and 2001, 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 $1.5 million and $870,000 were incurred in the nine-month periods
ended September 30, 2002 and 2001, respectively. These expenses are principally
comprised of legal and professional fees and other costs including office
supplies, conferences, travel costs, salaries, website update and development,
and other business development costs. In addition, the three months ended
September 30, 2002, included compensation expense of approximately $526,000
associated with the forgiveness of employee stock subscription notes receivable
and related income tax payable on behalf of the employees. The nine-month period
ended September 30, 2002, also includes executive compensation and directors and
officers' liability insurance premiums in excess of amounts incurred in 2001.
The amount recognized in the period ended September 2001 includes $384,000 for
litigation settlement costs.
Interest Income (Expense). Interest income (expense) for the periods ended
September 30, 2002 and 2001 was principally comprised of earnings from invested
cash offset by interest expense on the line of credit, notes payable and capital
leases payable.
10
BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A Development Stage Company)
Item 2. Management's Discussion and Analysis
or Plan of Operations
Income Taxes. While net operating losses were generated during the nine month
period ended September 30, 2002, we did not recognize any benefit associated
with these losses, as all related deferred tax assets have been fully reserved
for. 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 1997, resulting in
a tax benefit of $54,964. 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.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily from the sale of our
convertible preferred stock and common stock. From inception through September
30, 2002, we raised approximately $10.4 million, net of issuance costs, through
convertible preferred stock and common stock financings. At December 31, 2001,
we had cash and cash equivalents totaling approximately $76,000. At September
30, 2002, we had approximately $6.4 million 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
Small Business Innovation Research Grant (SBIR), which will continue to be
utilized in our research and development efforts.
NIH has formally awarded us a 2001 grant of $883,972 (of which we recognized
approximately 50% in 2001 and the remainder was recognized through June 2002),
and we were awarded a 2002 grant of $814,398 (of which $148,000 was recognized
in the period ended September 30, 2002, and the balance will be recognized
through June 30, 2003). Additionally, this award refers to third-year funding
levels of $989,352 that we expect to be awarded in 2003, subject to availability
and satisfactory progress of the project. Therefore, we expect to receive a
total of approximately $2.7 million related to our initial application for the
grant through June 2004. 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. In August 2002, NIH
awarded a second grant for $600,000 over two years, with expected funding in the
fourth quarter of 2002.
Working capital/deficit at December 31, 2001 was $1,185,268, which reflects our
legal claim settlement liability, our line of credit and our liability incurred
under our research agreement with the University of Medicine and Dentistry of
New Jersey, for which payments were deferred. Working capital at September 30,
2002 was $5,748,676, which reflects the net proceeds from our June 2002 common
stock offering, as well as payment of the line of credit, and settlement of the
legal claim of $75,000.
We used $2,025,598 of cash for operations in the nine months ended September 30,
2002, which reflects increased research and development and administrative
costs. On a pro forma basis (BioDelivery Sciences, Inc. combined with us) we
have used approximately $3.7 million of cash for operations since inception
through September 30, 2002, net of sponsored research proceeds received since
inception of approximately $8.3 million.
11
BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A Development Stage Company)
Item 2. Management's Discussion and Analysis
or Plan of Operations
Since our inception through September 30, 2002, we have incurred approximately
$3.4 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.,
BioDelivery Sciences, Inc. incurred approximately $6.8 million of research and
development expenses.
We are in the process of securing financing for the acquisition of certain
specialized laboratory equipment, with the expectation that we will purchase
approximately $1.5 million of assets between October 2002 and June 30, 2003. We
anticipate financing this equipment through a five-year note for $1,000,000 to
$1,500,000, depending on lender negotiations and initial equipment equity
requirements.
We have incurred significant net losses and negative cash flows from operations
since our inception. As of September 30, 2002, we had an accumulated deficit of
approximately $7.4 million.
We anticipate that cash used in operations and our investment in facilities will
increase significantly in the future as we research and develop our technology.
While we believe further application of our Bioral(TM) cochleate technology to
other molecules and nutraceuticals may result in license agreements with
manufacturers of ethical generic and over-the-counter drugs, as well as
nutraceutical applications, our plan of operations in the next 24 months is
focused on our further development of the Bioral cochleate technology itself and
its use in our lead proprietary product, Bioral Amphotericin B. The Company
recently identified the processed food and beverage industry as an additional
potential opportunity for licensing our technology.
We believe that our existing cash and cash equivalents will be sufficient to
finance our planned operations and capital expenditures through at least the
next 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 collaborative arrangements;
o grants;
o redemption and exercise of warrants
o license agreements
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.
During June 2002, our existing line of credit terminated and the balance was
repaid from the proceeds of our common stock offering.
12
BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A Development Stage Company)
Item 2. Management's Discussion and Analysis
or Plan of Operations
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS
142, Goodwill and Intangible Assets. SFAS 141 is effective for all business
combinations completed after June 30, 2001. SFAS 142 is effective for the year
beginning January 1, 2002; however, certain provisions of that Statement apply
to goodwill and other intangible assets acquired between July 1, 2001, and the
effective date of SFAS 142. The Company determined that the adoption of SFAS 142
did not have any impact on the Company's financial statements.
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement applies to all entities. It
applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and/or the normal
operation of a long-lived asset, except for certain obligations of lessees. This
Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company is evaluating the impact of the
adoption of this standard and has not yet determined the effect of adoption on
its financial position and results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. The provisions of the statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001. The Company adopted this standard effective January 1, 2002,
which did not have a material impact on the Company's 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 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 disclosure.
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.
13
BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A Development Stage Company)
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
A lawsuit was filed by Michael Pennessi d/b/a SSP Consultants, who is not
affiliated with us, arising out of an introduction to BioDelivery Sciences, Inc.
in 2000. A settlement for $75,000 in cash was reached prior to September 30,
2002 and recorded in the financial statements. However, the final settlement
documents had not been executed prior to September 30, 2002.
Item 2. Changes in Securities
During the three month period ended September 30, 2002, an over allotment of
85,000 units (the "Units") associated with the Company's June 2002 offering were
issued. Each Unit consists of (i) one share of Common Stock, par value $.001
(the "Common Stock") and (ii) one Class A common stock purchase Warrant (the
"Warrants"). Each Warrant entitles the owner to purchase one share of Common
Stock at a price of $6.30 for a period of four years commencing on June 24,
2003. Net proceeds of $394,708 were received from this issuance of 85,000 Units.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Employment Agreement with Raphael Mannino
10.2 Employment Agreement with Susan Gould-Fogerite
10.3 Employment Agreement with James A. McNulty
99.1 Certification by James A. McNulty
99.2 Certification by Francis E. O'Donnell, Jr.
(b) Reports on Form 8-K
NONE
14
BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A Development Stage Company)
Form 10-QSB
(for the quarterly period ended September 30, 2002)
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BIODELIVERY SCIENCES INTERNATIONAL, INC.
Date: November 13, 2002 /s/ James A. McNulty
-----------------------------------------
James A. McNulty, Chief Financial Officer
(Principal Financial Officer)
15
BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A Development Stage Company)
Form 10-QSB
(for the quarterly period ended September 30, 2002)
OFFICER CERTIFICATION
I, James A. McNulty certify that:
1. I have reviewed this quarterly report on Form 10-Q of BioDelivery Sciences
International, Inc. (the "Registrant");
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 officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, 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 officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent
functions):
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
16
BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A Development Stage Company)
Form 10-QSB
(for the quarterly period ended September 30, 2002)
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether 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: November 13, 2002
/s/James A. McNulty
------------------------
James A. McNulty
Chief Financial Officer
17
BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A Development Stage Company)
Form 10-QSB
(for the quarterly period ended September 30, 2002)
OFFICER CERTIFICATION
I, Francis E. O'Donnell, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of BioDelivery Sciences
International, Inc. (the "Registrant");
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 officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, 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 officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent
functions):
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
18
BIODELIVERY SCIENCES INTERNATIONAL, INC.
(A Development Stage Company)
Form 10-QSB
(for the quarterly period ended September 30, 2002)
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether 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: November 13, 2002
/s/ Francis E. O'Donnell, Jr.
-----------------------------
Francis E. O'Donnell, Jr.
Chief Executive Officer
19