United States Securities and Exchange Commission
Washington, D. C. 20549
Form 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
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[ ] 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
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BioDelivery Sciences International, Inc.
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(Name of small business issuer in its charter)
Delaware 35-2089858
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
UMDNJ Medical School
185 South Orange Avenue, Bldg. #4
Newark, New Jersey 07103
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number 973-972-0015
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of class)
Check 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Issuer's revenues for fiscal year 2002 were $827,972.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates as of March 20, 2003 was approximately $8,221,298 based on the
closing sale price of the company's common stock on such date of U.S. $2.40 per
share, as reported by the Nasdaq SmallCap Market.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
INTRODUCTORY NOTE
THIS REPORT, INCLUDING THE DOCUMENTS INCORPORATED BY REFERENCE IN THIS REPORT,
INCLUDES FORWARD-LOOKING STATEMENTS. WE HAVE BASED THESE FORWARD-LOOKING
STATEMENTS ON OUR CURRENT EXPECTATIONS AND PROJECTIONS ABOUT FUTURE EVENTS. OUR
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN, OR IMPLIED BY,
THESE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS ARE IDENTIFIED BY
WORDS SUCH AS "BELIEVE," "ANTICIPATE," "EXPECT," "INTEND," "PLAN," "WILL," "MAY"
AND OTHER SIMILAR EXPRESSIONS. IN ADDITION, ANY STATEMENTS THAT REFER TO
EXPECTATIONS, PROJECTIONS OR OTHER CHARACTERIZATIONS OF FUTURE EVENTS OR
CIRCUMSTANCES ARE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS IN
THESE DOCUMENTS INCLUDE, BUT ARE NOT NECESSARILY LIMITED TO, THOSE RELATING TO:
o OUR PLANS REGARDING THE TIMING AND OUTCOME OF RESEARCH AND DEVELOPMENT
RELATING TO THE BIORALTM TECHNOLOGY PLATFORM AND ANY PROPOSED PRODUCTS, THE
DOMESTIC AND INTERNATIONAL REGULATORY PROCESS INCLUDING THE US FOOD AND
DRUG ADMINISTRATION;
o OUR ABILITY TO GENERATE COMMERCIAL ACCEPTANCE OF OUR COCHLEATE DRUG
DELIVERY TECHNOLOGY PLATFORM;
o THE PROTECTION AND CONTROL AFFORDED BY OUR INTEREST IN LICENSED PATENTS, OR
OUR ABILITY TO ENFORCE OUR RIGHTS UNDER SUCH LICENSES;
o THE COMPETITION THAT MAY ARISE IN THE FUTURE;
o OUR ABILITY TO ENTER INTO SUBLICENSES;
o OUR ABILITY TO RETAIN MEMBERS OF MANAGEMENT AND EMPLOYEES OF THE COMPANY;
AND
o OUR ABILITY TO RECEIVE FEDERAL, STATE, GOVERNMENT OR PRIVATE GRANTS AND/OR
ATTRACT CAPITAL.
FACTORS THAT COULD CAUSE ACTUAL RESULTS OR CONDITIONS TO DIFFER FROM THOSE
ANTICIPATED BY THESE AND OTHER FORWARD-LOOKING STATEMENTS INCLUDE THOSE MORE
FULLY DESCRIBED IN THE "RISK FACTORS" SECTION AND ELSEWHERE IN THIS REPORT. WE
ARE NOT OBLIGATED TO UPDATE OR REVISE THESE FORWARD-LOOKING STATEMENTS TO
REFLECT NEW EVENTS OR CIRCUMSTANCES.
PART I
Item 1. Description of Business.
Overview
We are a biotechnology company that is developing and seeking to commercialize a
drug delivery technology designed for a potentially broad base of prescription
drugs, vaccines, and over-the-counter drugs. Our proposed drug delivery
technology encapsulates the selected drug in a nanocrystalline structure termed
a "cochleate" cylinder. All of the components of the cochleate cylinder are
naturally occurring substances. We believe that the cochleate cylinder provides
an effective delivery mechanism without forming a chemical bond, or otherwise
chemically altering, the drug. Our drug delivery technology was developed in
collaboration with the University of Medicine and Dentistry of New Jersey and
the Albany Medical College which have each granted us the exclusive worldwide
licenses under applicable patents.
We believe that our drug delivery technology is potentially applicable with a
broad base of existing and new drugs, vaccines, and over-the-counter drugs. Once
we have established our licensed drug delivery technology, we intend to seek
commercialization through a combination of marketing approaches which, we
anticipate, may include marketing drugs no longer under patent protection under
our brand name BioralTM, licensing our encochleation technology to other
pharmaceutical companies and entering into various types of agreements with
other bio-technology or pharmaceutical companies.
In addition to developing and commercializing our drug delivery technology and
initial BioralTM products, we are also preparing an application seeking to begin
Phase I clinical trials with the FDA with regard to our HIV therapy. This
technology is being developed as a patient specific (autologous) therapy for
treatment following HIV infection. Our autologous HIV therapy is based upon a
patented proteoliposome technology, which we believe facilitates uptake by cells
responsible for stimulating immune responses. We believe that the ongoing
research and development of this technology will require significant time and
resources and we intend to primarily rely upon the availability of grants and
corporate support to largely finance further development of this technology.
Our offices and scientific facilities are located at the University of Medicine
and Dentistry of New Jersey, 185 South Orange Avenue, Administrative Building 4,
Newark, New Jersey 07103 and our telephone number is (973) 972-0015. In this
Report, the terms "Company," "we," "us," "our" and similar terms refer to
BioDelivery Sciences International, Inc., a Delaware corporation.
Historical and Recent Events
Formation Activities
MAS Acquisition XXIII Corp., our original corporate name (referred to herein as
MAS XXIII), was formed in Indiana on January 6, 1997. In January 2000, an
investment group, led by Dr. Francis E. O'Donnell, our current President and
CEO, acquired a controlling interest in MAS XXIII for the purpose of
facilitating an investment by us in BioDelivery Sciences, Inc., a Delaware
corporation. At the time of the investment, MAS XXIII did not conduct any
business, nor did it have any meaningful operations. Prior to Dr. O'Donnell's
investment group purchasing a majority interest, MAS XXIII was controlled by Mr.
Aaron Tsai who was the President and CEO as well as a majority stockholder.
Several companies which are not affiliated with us in any capacity, that Mr.
Tsai and MAS Capital, Inc., a registered broker dealer, have been involved with
previously, have been the subject of regulatory investigation. After Dr.
O'Donnell's investment group bought a majority interest in MAS XXIII, Mr. Tsai
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resigned from any position in management and has no direct or indirect role in
our management. On March 29, 2002, Hopkins Capital Group II, LLC, controlled by
Dr. O'Donnell, entered into an agreement with MAS Capital, Inc. and Mr. Tsai to
purchase and surrender all of their interest in our securities, consisting of
74,966 shares of common stock and to return to us 22,881 options, respectively
for $150,696 in the form of a promissory note payable March 29, 2003.
Our business opportunity is primarily the drug delivery technology developed by
BioDelivery Sciences, Inc. BioDelivery Sciences, Inc., the Delaware entity, was
formed in 1995 by Drs. Raphael Mannino and Susan Gould-Fogerite, who are
currently members of our management, and others, in order to conduct research
and development on various vaccines. On October 10, 2000, with the proceeds of
the investment from the investment group led by Dr. O'Donnell, we purchased
shares of the Series A convertible preferred stock of BioDelivery Sciences, Inc.
which resulted in our owning securities representing 84.8% of its voting stock.
In September 2000, immediately prior to completing the investment and gaining
control of BioDelivery Sciences, Inc., we changed our name from MAS Acquisition
XXIII Corp. to BioDelivery Sciences International, Inc. In May 2001, we acquired
common stock of BioDelivery Sciences, Inc. from a group of its stockholders,
which resulted in our owning 9% (representing 1.4% of the total voting rights of
BioDelivery Sciences, Inc.) of the outstanding common stock.
In January 2002, we completed our merger with BioDelivery Sciences, Inc.
bringing our aggregate voting right in BioDelivery Sciences, Inc. to 100% and
resulted in our owning all of its assets, including but not limited to the
control over the intellectual property involving the drug delivery technology,
subject to all the liabilities as well. As a result of the merger, we were the
surviving company and BioDelivery Sciences, Inc. ceased operations as a separate
entity. Consequently, except where specifically noted to the contrary, all
discussions in this Report reflect our completion of the merger of BioDelivery
Sciences, Inc. and thus refers to such business operations as those of ours. We
ceased being an Indiana corporation and became a Delaware corporation through a
re-incorporation merger effected on June 3, 2002.
Stock Split
In May 2002, we also effected a reverse stock split of our capital stock on a
one for 4.37 shares basis. All references in this Report to our outstanding
common stock and other securities reflect such reverse split.
Public Offering and Financing
On June 24, 2002, the Securities and Exchange Commission declared our
Registration Statement on Form SB-2, Registration No. 333-72877, effective.
Commencing on June 25, 2002, and pursuant to such Registration Statement, we
conducted an offering consisting of 2,000,000 units, or Units, with each Unit
consisting of (i) one share of common stock, par value $.001 per share, and (ii)
one Class A common stock purchase warrant, or Warrants. Each Warrant entitles
the owner to purchase one share of our common stock at a price of $6.30 for a
period of four years commencing on June 24, 2003.
The offering price for each Unit was $5.25 and the aggregate offering price was
$10,500,000. The managing underwriter of the offering was Kashner Davidson
Securities Corporation. The aggregate underwriting discount was $897,750 and the
non-accountable expense allowance paid to the underwriter was $315,000.
Additional offering expenses paid between the offering date and June 30, 2002
was $230,000 for printing, $410,000 for legal fees, $200,000 for accounting fees
and $270,560 for other expenses of the offering. The expenses of the offering
equaled $2,323,310. None of these expenses were paid to directors, officers or
persons owning 10 percent of the securities of the Company.
The net offering proceeds we received, after deducting the offering expenses
described above, was $8,176,690. From June 25, 2002 until June 30, 2002,
$1,050,000 of such proceeds was used to repay the a line of credit, which
terminated June 30, 2002. The remaining proceeds were invested in short-term
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certificates of deposit. There were no payments made to officers, directors, and
persons owning more than 10 percent of the securities of the Company. During the
three month period ended September 30, 2002, the underwriters exercised an
over-allotment option for 85,000 Units, resulting in net proceeds to the Company
of $394,707.
We intend to finance our research and development efforts and our working
capital needs with the proceeds from the offering and through licensing and
joint venture arrangements with pharmaceutical companies, whose own proprietary
pharmaceutical products may benefit from our nanocochleate technology. On
December 31, 2002, we entered into an agreement with Pharmaceutical Product
Development, Inc, a North Carolina corporation, referred to herein as PPDI,
pursuant to which PPDI was granted a license to apply our BioralTM nano-delivery
technology to two therapeutic products. There is also the possibility of
licensing income from applications of our technology to over-the-counter drugs,
generics, nutraceuticals and, through our subsidiary, Bioral Nutrient Delivery,
LLC, processed foods and beverages. To the extent that additional capital needs
are required, we 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 our operations, management believes
such sources will be available to us.
Bioral Nutrient Delivery, LLC
On January 8, 2003, we formed a new Delaware subsidiary, Bioral Nutrient
Delivery, LLC, or BND, to exploit our delivery technology for non-pharmaceutical
use in the processed food and beverage industries for both human and animal
consumption. We intend to grant BND an exclusive world-wide perpetual
sub-license to our proprietary, licensed Bioral(TM) technology for use in such
segments. We will at all times act as the managing member of BND and, through a
board of directors and officers appointed directly or indirectly by us, will at
all times make all management decisions relating to BND. As a limited liability
company, BND may, at the discretion of its board of directors, distribute
available net cash to its member shareholders.
We have previously entered into an evaluation agreement and begun testing of the
encochleation technology for use in the pet food industries, which technology
will be licensed to BND. BND will continue to monitor and develop the progress
under the evaluation agreement. Although neither BND nor we have entered into
any formal licensing agreements or come to terms with any potential licensees,
we are encouraged by our preliminary results and findings and believe that a
viable business opportunity exists.
On February 13, 2003, we made an unsecured loan to BND in the amount of $500,000
to cover organization expenses and initial working capital requirements. The
loan accrues interest at a rate of 4.85% annually, to be paid back solely from
10% of any royalty revenue that may be received by BND, with payments first
applied to interest, then to principal. We are under no obligation to make any
capital contributions or any additional loan funds to BND beyond the initial
$500,000.
We intend to enter into a management services and administrative agreement with
BND, pursuant to which certain of our officers and employees will provide
services and space to BND, since we believe that BND's short-term objectives can
be met without hiring full-time employees or renting space.
We are intending to distribute to our stockholders, as a dividend, rights to
purchase directly from us Class B membership shares of BND, which Class B
membership shares we currently own. Our plan is to initially distribute rights
to purchase approximately 50% of the currently outstanding economic interests in
BND and then, on a quarterly basis for a three (3) year period, distribute
additional rights to purchase additional Class B membership shares from us. Such
3
interests will be subject to significant dilution. In February, 2003, BND filed
a registration statement with the SEC to register such rights and such Class B
membership, and we will not declare any such dividend of rights until such
registration statement is declared effective, for which no assurances can be
given.
Overview of the Drug Delivery Industry
The drug delivery industry develops technologies for the improved administration
of certain drugs. These technologies have focused primarily on safety, efficacy,
ease of patient use and patient compliance. Pharmaceutical and biotechnology
companies view new and improved delivery technology as a way to gain competitive
advantage through enhanced safety, efficacy, convenience and patient compliance
of their drugs.
Drug delivery technologies can provide pharmaceutical and biotechnology
companies with an avenue for developing new drugs, as well as extending existing
drug patent protections. Drug delivery companies can also apply their
technologies to drugs no longer patent protected.
We believe that focusing our drug delivery technology for use with existing FDA
approved drugs to be less risky than attempting to discover new drugs. When
management believes that the market opportunity exists and given the right
circumstances however, we may consider devoting resources to discovering new
drugs.
We intend to primarily target drugs that have large established markets for
which there is an established medical need and therefore doctors are familiar
with the drug compounds and are accustomed to prescribing them. We anticipate
that many of the drug candidates we target will have been through the regulatory
process and therefore the safety and efficacy of the drug has been previously
established. Consequently, we believe that our clinical trials would primarily
need to show that our encapsulation technology delivers the drug without harming
the patient or changing the clinical attributes of the drug. Focusing on drug
delivery compared to drug discovery should allow us to potentially form a number
of collaborations to deliver a wide variety of medicines without limiting rights
to utilize our proprietary technology with additional drug opportunities.
Description of Our Drug Delivery Technology
Overview
Our drug delivery technology is based upon encapsulating drugs to potentially
deliver the drug safely and effectively. Over the years, biochemists and
biophysicists have studied artificial membrane systems to understand their
properties and potential applications, as well as to gain insight into the
workings of more complex biological membrane systems. In the late 1960's,
scientists began investigating the interactions of divalent cations with
negatively charged lipid bilayers. They reported that the addition of calcium
ions to small phosphatidylserine vesicles induced their collapse into discs
which fused into large sheets of lipid. In order to minimize their interaction
with water, these lipid sheets rolled up into nanocrystalline structures, termed
"cochleates," after the Greek name for a snail with a spiral shell.
BioralTM cochleate technology is based upon components which are believed to be
non-toxic. The primary chemical components of our BioralTM cochleate technology
are phosphatidylserine (PS) and calcium. Phosphatidylserine is a natural
component of essentially all biological membranes, and is most concentrated in
the brain. Clinical studies by other investigators (more than 30 have been
published that we are aware of) to evaluate the potential of phosphatidylserine
as a nutrient supplement indicate that PS is safe and may play a role in the
support of mental functions in the aging brain. As an indication of its nontoxic
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nature, today phosphatidylserine isolated from soybeans is sold in health food
stores as a nutritional supplement.
Research and development of cochleates has been conducted at the University of
Medicine and Dentistry of New Jersey and Albany Medical College, referred to
herein as the Universities, for a number of years. Our scientists, some of whom
were former researchers and others who still hold teaching positions with these
Universities, supervised their cochleate research programs. As a result of the
relationship between our scientists and the Universities, we became the
exclusive worldwide licensee to develop this cochleate technology and in some
cases co-own the patents with them. See "Description of Business -- Relationship
with the University of Medicine and Dentistry of New Jersey and Albany Medical
College."
Potential Advantages
We believe that our drug delivery technology represents a potentially important
new delivery mechanism. While the characteristics and benefits of our drug
delivery technology will ultimately be established through FDA clinical trials,
our research, based upon pre-clinical studies indicates that our drug delivery
technology may have the following characteristics:
Oral Availability. Our drug delivery technology is being developed to
enable oral availability of a broad spectrum of compounds, such as those with
poor water solubility, and protein and peptide biopharmaceuticals, which have
been difficult to administer.
Encapsulation. Our drug delivery encapsulates, rather than chemically
bonds, with the drug.
Minimizing Side Effects. Our drug delivery technology may reduce toxicity,
stomach irritation and other side effects of the encapsulated drug.
Stability. Our drug delivery technology employs cochleate cylinders which
consist of unique multi-layered structures of large, continuous, solid, lipid
bilayer sheets rolled up in a spiral, with no internal aqueous space. We believe
that our cochleate preparations can be stored in cation-containing buffer, or
lyophilized to a powder, stored at room temperature, and reconstituted with
liquid prior to administration. Our cochleate preparations have been shown to be
stable for more than two years in cation-containing buffer, and at least one
year as a lyophilized powder at room temperature.
Cellular Delivery. Our drug delivery technology is being developed as
membrane fusion intermediates. We believe that, when drugs encapsulated in our
drug delivery technology come into close approximation to a target membrane, a
fusion event between the outer layer of the cochleate cylinder and the cell
membrane may occur. This fusion may result in the delivery of a small amount of
the encochleated material into the cytoplasm of the target cell. Further, we
believe that drugs encapsulated in our drug delivery technology may slowly fuse
or break free of the cell and be available for another fusion event, either with
this or another cell.
Resistance to Environmental Attack. Our drug delivery technology is being
developed to provide protection from degradation of the encochleated drug.
Traditionally, many drugs can be damaged from exposure to adverse environmental
conditions such as sunlight, oxygen, water and temperature. Since the cylinder
structure consists of a series of solid layers, we believe that components
within the interior of the cochleate structure remain intact, even though the
outer layers of the cochleate may be exposed to these conditions.
Patient Compliance. We believe that a potential benefit of our cochleate
cylinders may include reducing unpleasant taste, unpleasant intestinal
irritation, and in some cases providing oral availability.
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Release Characteristics. Our cochleate technology may offer the potential
to be tailored to control the release of the drug depending on desired
application.
Initial BioralTM Products in Development
We plan a diverse pipeline of products to be developed by applying our drug
delivery technology to a potentially broad array of established and promising
pharmaceuticals. Each intended BioralTM product (i.e. drug and neutraceutical
encapsulated with our drug delivery technology) will, upon completion of
development, require separate FDA regulatory approval, and accordingly, will be
subject to the uncertainty, time and expense generally associated with the FDA
regulatory process. Even though we are targeting FDA approved, market-accepted
drugs for encapsulation, each of the products currently in development face
development hurdles, regulatory requirements and uncertainty before market
introduction. As summarized below, we have initially targeted three potential
BioralTM products for development.
Product Status
----------------------------- ----------------------- ----------------- ------------------ -----------------------------
Indication Products Category Pre-Clinical FDA Status
Development
----------------------------- ----------------------- ----------------- ------------------ -----------------------------
Systemic fungal infection Antifungal Antimicrobial Formulation Submission for Phase I IND
Bioral development being prepared, GMP
Amphotericin B almost manufacturing initiated.
completed. In
vitro and in
vivo efficacy
data in progress
----------------------------- ----------------------- ----------------- ------------------ -----------------------------
Tuberculosis and bacterial Antibacterial Bioral Antimicrobial Formulation Pre-clinical development
infections development in
process.
----------------------------- ----------------------- ----------------- ------------------ -----------------------------
Inflammatory disease Bioral OTC Medicine Formulation and Pre-clinical development
Anti-Inflammatory in vitro studies
in process
----------------------------- ----------------------- ----------------- ------------------ -----------------------------
Bioral Amphotericin B. We are currently developing a BioralTM product for
treatment of fungal infection which we plan to submit to the FDA for a Phase I
Investigational New Drug Application (IND). In the last year, we have
successfully sourced phosphatidylserine, or PS, from lecithin derived from
soybeans rather than synthetic PS, thereby reducing the costs of goods for our
delivery system. In addition, we have simplified our manufacturing approach to
Bioral Amphotericin B, thereby facilitating commercial scale-up. Also, we have
been investigating the ratio of PS to cargo molecules in order to optimize
clinical performance while moderating costs simultaneously. Accordingly we
estimate the filing of our IND will be made in the first quarter of 2004.
Systemic fungal infections continue to be a major domestic and international
health care problem. In the mid-1990s, Amphotericin B was the most commonly used
drug to treat these infections in the United States.
The major types of systemic fungal infections are normally controlled and
disposed of by the body's immune system. However, patients whose immune systems
have been suppressed by therapies for cancer, bone marrow transplants or
diseases such as AIDS can lose the ability to combat these infections. Systemic
Candidiasis, the most common type of invasive fungal infection, represents the
majority of all such infections, with fatality rates between 30 and 40 percent.
Aspergillosis, while occurring less frequently, is a significant threat as
fatality rates for this infection range as high as 90 percent.
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Cryptococcal meningitis is a disease that frequently strikes patients with AIDS.
The use of conventional Amphotericin B to treat these infections is often
limited by its propensity to cause kidney damage which we believe our BioralTM
products may minimize.
Amphotericin B is an established drug which is delivered intravenously. The
primary advantage which we are seeking for our proposed Bioral Amphotericin B
product is an oral form of the drug. Additional potential advantages include
improved safety, extended shelf life, improved cellular uptake and reduced
dosage. Assuming that we complete development of our proposed Bioral
Amphotericin B and that we obtain FDA approval, we believe that Bioral
Amphotericin B (a Bioral encapsulation of Amphotericin B) may provide an
effective orally administered version of Amphotericin B which may be more
effective and less toxic.
In the development of this drug, we are collaborating with the National
Institutes of Health, or NIH, the Public Health Research Institute of New York
and the University of Kentucky. Further, we have been awarded a three-year grant
totaling approximately $2.7 million (the first two years of which total $1.7
million, with an additional $1.0 million for the third year) from the NIH to
support the further development of this drug if it believes in its judgment that
progress continues to be made.
Tuberculosis Development. We are currently developing a BioralTM product to
target tuberculosis. The bacillus is suspected to reside latently in a large
population of people, and remains viable for infection in those people for many
years past the initial infection stage.
We are targeting an off-patent drug, and may target other drugs which treat
tuberculosis, for potential encapsulation in our drug delivery technology. The
primary advantages which we are seeking for our proposed Bioral product include
increased oral bio-availability, reduce required dosage and decrease side
effects. Assuming that we complete development of this BioralTM drug and that we
obtain FDA approval, we believe that it may provide an effective, orally
administered version of a tuberculosis agent. This BioralTM product in
development may be administered orally, be more effective and have fewer side
effects. Before finalizing our selection of an anti-tuberculosis therapeutic for
commercialization, we will be consulting with experts from our Scientific
Advisory Board, the Public Health Research Institute of New York and the NIH. We
estimate that the preparation of an IND will be completed in the third quarter
of 2004, assuming the data in pre-clinical trials are favorable and the funding
is available.
Bioral Anti-Inflammatory. We have targeted inflammation disorders, such as
arthritis, for development of BioralTM products, based upon accepted,
unpatented, over-the-counter, anti-inflammatory drugs such as generic aspirin or
ibuprofen. Various types of over-the-counter anti-inflammatory compounds are
currently available. Nonsteroidal anti-inflammatory drugs significantly decrease
inflammation at higher dosages.
We believe that our drug delivery technology may be used to effectively deliver
anti-inflammatory drugs with reduced side effects. The primary advantages which
we are seeking for our proposed BioralTM anti-inflammatory products include
reduced gastrointestinal side effects, reduced required dosage and improved
cellular uptake. Anti-inflammatories formulated within cochleates are inside a
multi-layered solid particle which we believe may enhance the safety and
efficacy profiles and could potentially transform the compounds into an entirely
new class of improved anti-inflammatory drugs. As part of our pre-clinical
development, initial formulations have been tested in vitro. We are in the
process of preparing formulations as part of our preparation to commence
pre-clinical development.
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Our Autologous HIV Therapy
As part of our research and development activities, we have developed and are
investigating our patented autologous (patient-specific) HIV therapy for AIDS
which uses a cochleate related (proteoliposome) delivery vehicle. This
immunotherapeutic is autologous meaning that it contains the specific patient's
virus or membrane protein. Our autologous HIV therapy is intended to boost or
alter the immune response in patients already infected with HIV.
We are preparing a submission to the FDA seeking to begin Phase I clinical
trials as a follow-up to our initial clinical trials which were conducted
pursuant to an Institutional Review Board process. Our development for this
proposed Autologous HIV Therapy has not been completed. We estimate that the
preparation of an IND will begin in the second quarter of 2003, assuming that
funding is available. We believe that the time, expense and risk to market is
substantial and uncertain, particularly when compared to that which we
anticipate for the potentially broad-base of pharmaceuticals and vaccines which
may ultimately be encapsulated in our drug delivery technology. Accordingly, we
intend to primarily rely upon the availability of grants and corporate partners
to largely finance the further research and development of this technology.
Relationship with The University of Medicine and Dentistry of New Jersey and
Albany Medical College
We have had and continue to have critical relationships with the University of
Medicine and Dentistry of New Jersey and Albany Medical College. Some of our
scientists were former researchers and educators at these Universities
researching cochleate technology. All of our current research and development is
done using facilities provided to us on the campus of the University of Medicine
and Dentistry of New Jersey, pursuant to a lease, or at the facilities of our
contractors or collaborators. Both of these Universities are stockholders in our
company and have a substantial financial interest in our business.
In September 1995, we entered into a license agreement with the Universities to
be the exclusive worldwide developer and sub-licensor of the cochleate
technology. Under the license agreement, we and the Universities have also
jointly patented certain aspects of the cochleate technology and co-own such
patents with them.
Pursuant to the license agreement, we agreed that each university would be
issued an equity interest in our capital stock, originally equal to 2% of our
outstanding capital stock. These arrangements were subsequently revised in
December, 2002. On December 16, 2002, we amended our license agreement with the
Universities to provide for a decrease in the royalty payments to be paid to the
Universities on sublicenses in consideration of an increase in the royalty on
product sales and the issuance to the Universities of options to purchase shares
of our common stock. As of December 31, 2002, the University of Medicine and
Dentistry of New Jersey owns 139,522 shares (including shares issued under a
research agreement) and warrants to purchase 8,951 shares of our common stock at
$3.05 and 75,000 options to purchase our common stock at a price per share of
$2.37, which options are subject to stockholder approval. As of December 31,
2002, Albany Medical College owns 2,222 shares of our common stock and warrants
to purchase 9,951 shares of our common stock at $3.05 and 75,000 options to
purchase our common stock at a price per share of $2.37, which options are
subject to stockholder approval. There are no further requirements to provide
either university any additional equity interests in our company.
The license agreement, as amended, grants us an exclusive license to the
technology owned by these Universities and obligates us to pay a royalty fee
structure as follows:
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(a) For commercial sales made by us or our affiliates, we shall pay to the
Universities a royalty equal to 5% of our net sales; and
(b) For commercial sales made by any of our sublicensee, we shall pay to
the Universities royalties up to 5% of our revenues received from the
sublicensee from the sale of the product.
Our royalty payments to the Universities will be divided equally among them
pursuant to the license.
The Universities have reserved the right to use and permit the use of our
licensed technology and licensed patents by non-profit organizations for
educational and research purposes on a non-commercial basis. In April 2001, we
entered into a research agreement with the University of Medicine and Dentistry
of New Jersey whereby we and the university agree to share the rights to new
research and development that jointly takes place at the university's facilities
until December 31, 2005. We also agreed to provide the university with progress
and data updates and allow its researchers to publish certain projects. We lease
our research facilities totaling approximately 8,000 square feet located on
their campus pursuant a lease agreement ending December 31, 2005. The monthly
rent was $3,340 for 2001, $3,840 for 2002, $4,340 for 2003, $4,840 for 2003 and
$5,340 for 2005.
In addition to our rent payments, we have also agreed to pay for certain other
services provided by the university. These include employing three graduate
students from the university for a total of $51,840, a budget to purchase
chemicals totaling approximately $40,000 (adjusted to exact cost), and an
indirect cost factor constituting 8% for 2001 (12% in 2002, 16% in 2003, 20% for
2004 and 24% for 2005) of the direct costs of the graduate students and
chemicals. Research assistants and personnel provided to us are university
employees and they belong to various unions on campus. Beginning in the fourth
quarter of 2002, the university employees and graduate students transferred to
our payroll, including one graduate student who subsequently completed her
Ph.D., and the monthly payments directly to UMDNJ were reduced accordingly. The
payments for rent and supplies are expected to be approximately $75,000
annually.
Collaborative and Supply Relationships
We are a party to collaborative agreements with universities, government
agencies, corporate partners, and contractors. Research collaboration may result
in new inventions which are generally considered joint intellectual property.
Our collaboration arrangements are intended to provide us with access to greater
resources and scientific expertise in addition to our in-house capabilities. We
also have supply arrangements with a few of the key component producers of our
delivery technology. Our relationships include:
o PPDI. On December 31, 2002, we entered into an agreement with PPDI,
pursuant to which PPDI was granted a license to apply our BioralTM
nano-delivery technology to two therapeutic products. The terms of the
license require one upfront royalty payment to us, additional royalty
payments based on regulatory milestones and a running royalty rate
based on worldwide sales.
o National Institutes of Health. To investigate the properties of new
antifungal cochleate formulations. Grants totaling approximately $2.7
million have been awarded to us by NIH for the development of our
proposed Amphotericin B product. Additionally, we are conducting
anti-fungal studies using our drug delivery technology through NIH
selected and paid contractors. The NIH has reserved broad and
subjective authority over future disbursements under the grant. While
no objective or specific milestones for future disbursements have been
established by the NIH, we must generally demonstrate to the
9
satisfaction of the NIH that our research and use of proceeds are
consistent with the goal of developing a formulation for the oral
delivery of Amphotericin B. Furthermore, we are required to submit to
the NIH an annual report of activities under the grant. To date we
have received all expected disbursements under the NIH grant and
anticipate that future disbursements will be made by the NIH under the
terms of the grant.
o Public Health Research Institute of New York. To investigate our
proposed Amphotericin B product and other anti-fungal applications of
our drug delivery technology. This relationship may involve shared
expense reimbursement and shared intellectual property with regard to
joint inventions.
o University of Texas, MD Anderson Cancer Center. On August 9, 2002, a
NIH grant was awarded to develop an innovative HIV vaccine strategy.
The grant will test the utility of novel adjuvants using our cochleate
delivery vehicle for formulating the peptide cocktail vaccine and
testing it in mice before contemplating primate studies and clinical
trials.
o University of Kentucky. Contracts have been signed with the University
of Kentucky to scale up our Amphotericin B formulation. The University
of Kentucky will also perform a radio labeled study in rabbits to
assess the biodistribution of our Amphotericin B formulation.
We also have agreements with entities that are affiliated with and
partially-owned by key members of our board of directors and management to
conduct research and license certain proposed drugs. See "Certain Relationships
and Related Transactions" for affiliations with our management. As of December
31, 2001, our board of directors appointed an audit committee consisting of
independent directors to review all agreements and transactions which have been
entered into with related parties, as well as all future related party
transactions. At the meeting the independent board members, with Dr. O'Donnell
abstaining, and after seeking and reviewing advice from an independent valuation
firm and inquiring about the details of the various transactions, ratified all
prior related party transactions. Subsequent to this meeting, the audit
committee independently ratified these agreements. No new related party
contracts have been entered into since our initial public offering in June,
2002. The following are the related-party agreements entered into prior to such
offering:
o RetinaPharma International, Inc. We have entered into a license
agreement with this development-stage biotechnology company to use our
delivery technology in connection with their proposed neutraceutical
product with potential application for macular degeneration and
retinitus pigmentosa, a disease affecting the retina. This exclusive
worldwide right to use our drug delivery technology in conjunction
with their effort to develop, commercialize and manufacture their
proposed product, or to sublicense to a third party, is only for the
purpose of treating antiapoptotic pharmaceutical and nutriceutical
treatment of retinal disease and glaucoma. This license shall remain
in effect as long as RetinaPharma International, Inc. remains in
compliance with the terms of the agreement.
o Tatton Technologies, LLC. We have entered into a license agreement
with this development-stage biotechnology company to use our delivery
technology in connection with their proposed neutraceutical products
with potential application to various neuro-degenerative diseases.
Tatton Technologies, LLC is developing and plans to commercialize
technology regarding certain apoptotic drugs and apoptotic naturally
occurring substances to treat certain neuro-degenerative diseases. We
10
have entered into exclusive worldwide licenses allowing Tatton
Technologies, LLC to incorporate our drug delivery technology into
their effort to develop and potentially commercialize their drug.
Tatton Technologies, LLC may sublicense our drug delivery technology
to third parties to incorporate into their proposed product and this
license shall remain in effect as long as both parties remain in
compliance with the terms of the agreement.
o BioKeys Pharmaceuticals, Inc. We have entered into a letter of intent
to seek a license agreement with this development-stage biotechnology
company to use our delivery technology in connection with the
development of its proposed vaccine technology. BioKeys
Pharmaceuticals, Inc., in conjunction with a third party, will conduct
research to develop their EradicAids Vaccine Project. This proposed
license shall remain in effect as long as BioKeys remains in
compliance with the terms of the agreement.
o Biotech Specialty Partners, LLC. We have entered into a non-exclusive
distribution agreement with this development-stage distribution
company to market and distribute our proposed products once we have
completed the commercialization of our products. Our financial
arrangement with Biotech Specialty Partners, LLC, or BSP, requires us
to sell to BSP all of our proposed products, as and when purchased by
with BSP at a cost which is the lesser of:
(i) ten percent (10%) below the lowest wholesale acquisition
cost, inclusive of rebates, quantity discounts, etc.; and
(ii) the lowest cost at which we are then selling the product(s)
to any other purchaser. The term of the agreement shall be
for a term of five years once a product becomes available
for distribution. BSP is a start-up enterprise, which to
date has not distributed any pharmaceutical products.
These agreements generally provide that, except for on-going development costs
related to our drug delivery technology, we are not required to share in the
costs of the development of the pharmaceutical product or technologies of these
companies.
We are entitled to receive the following royalty payments:
o RetinaPharma International, Inc. We are entitled to 10% of all net
revenue from the sale for the authorized use of our technology
incorporated into the product. The planned RetinaPharma product is in
its early stage of development and no sales of such product or royalty
revenue therefrom is anticipated in the foreseeable future.
o Tatton Technologies, LLC. We are entitled to 10% of all net revenue
from the sale for the authorized use of our technology incorporated
into their proposed product with potential application to various
neuro-degenerative diseases. The planned Tatton Technologies product
is in its early stage of development and no sales of such product or
royalty revenue therefrom is anticipated in the foreseeable future.
o BioKeys Pharmaceuticals, Inc. We are in the process of negotiating a
royalty on net revenue from the license of our drug delivery
technology. We previously received a $35,000 loan from BioKeys
Pharmaceuticals, Inc. to begin research on BioKeys Pharmaceuticals,
Inc. products incorporating our technology, which loan was paid in
full in July 2002. The planned BioKeys Pharmaceuticals, Inc. product
is in its early stage of development and no sales of such product or
royalty revenue therefrom is anticipated in the foreseeable future.
11
In pursuing potential commercial opportunities, we intend to seek and rely upon
additional collaborative relationships with corporate partners. Such
relationships may include initial funding, milestone payments, licensing
payments, royalties, access to proprietary drugs or potential
"nano-encapsulation" with our drug delivery technology or other relationships.
While we have not, to date, entered into any such arrangements, we are currently
in discussion with a number of pharmaceutical companies.
Collaborative Agreements in Negotiation
We have entered into an evaluation agreement with a major manufacturer of pet
food with global sales and have begun related testing of our encochleation
technology for use in the pet food industries, which technology will be licensed
to our subsidiary, BND. We have and will continue to monitor and develop the
progress of our licensed technology under such evaluation agreement. Although we
have not entered into any formal licensing agreements or come to terms with any
potential licensees, we are encouraged by our preliminary results and findings
and believe that a viable business opportunity exists.
We have signed an evaluation agreement with a major pharmaceutical company to
design a cochleate formulation of one of their injectable products.
Licenses, Patents and Proprietary Information
We are the exclusive licensee of nine issued United States patents and three
foreign issued patents owned by the parties listed in the chart below.1 We
believe that our licenses to this intellectual property will enable us to
develop this new drug delivery technology based upon cochleate and cochleate
related technology. Our intellectual property strategy is intended to maximize
our potential patent portfolio, license agreements, proprietary rights and any
future licensing opportunities we might pursue. With regard to our BioralTM
cochleate technology, we intend to seek patent protection for not only our
delivery technology, but also potentially for the combination of our delivery
technology with various drugs no longer under patent protection. Below is a
table summarizing patents we believe are currently important to our business and
technology position.
------------------------ ----------------- ---------------- ---------------------------- -----------------------------
Patent Number Issued Expires Title Owner
------------------------ ----------------- ---------------- ---------------------------- -----------------------------
US06,340,591 1/22/2002 1/14/18 Integrative protein DNA The University of Medicine
cochleate formulations and and Dentistry of New Jersey
methods for transforming and the University of
cells Maryland
------------------------ ----------------- ---------------- ---------------------------- -----------------------------
EUR0722338 7/25/2001 9/30/2014 Protein- and peptide The University of Medicine
cochleate vaccines methods and Dentistry of New Jersey
of immunizing using the and Albany Medical College
same
------------------------ ----------------- ---------------- ---------------------------- -----------------------------
US06,165,502 12/26/2000 9/11/2016 Protein-lipid vesicles and The University of Medicine
autogenous and Dentistry of New Jersey
immunotherapeutic and Albany Medical College
comprising the same
12
------------------------ ----------------- ---------------- ---------------------------- -----------------------------
US06,153,217 11/28/2000 1/22/2019 Nanocochleate BioDelivery Sciences
formulations, process of International, Inc., The
preparation and method University of Medicine and
delivery of pharmaceutical Dentistry of New Jersey and
agents Albany Medical College
------------------------ ----------------- ---------------- ---------------------------- -----------------------------
AUS722647 11/23/2000 9/02/2017 Protein-lipid vesicles and The University of Medicine
autogenous and Dentistry of New Jersey
immunotherapeutic and Albany Medical College
comprising the same
------------------------ ----------------- ---------------- ---------------------------- -----------------------------
US05,994,318 11/30/1999 11/24/2015 Cochleate delivery vehicles The University of Medicine
and Dentistry of New Jersey
and Albany Medical College
------------------------ ----------------- ---------------- ---------------------------- -----------------------------
US05,840,707 11/24/1998 11/24/2015 Stabilizing and delivery The University of Medicine
means of biological and Dentistry of New Jersey
molecules and Albany Medical College
------------------------ ----------------- ---------------- ---------------------------- -----------------------------
US05,834,015 11/10/1998 9/11/2016 Protein-lipid vesicles and The University of Medicine
autogenous and Dentistry of New Jersey
immunotherapeutic and Albany Medical College
comprising the same
------------------------ ----------------- ---------------- ---------------------------- -----------------------------
AUS689505 2/2/1998 9/30/2014 Protein- or peptide- The University of Medicine
cochleate and Dentistry of New Jersey
immunotherapeutics and and Albany Medical College
methods of immunizing
using the same
------------------------ ----------------- ---------------- ---------------------------- -----------------------------
US05,643,574 07/01/1997 7/01/2014 Protein- or peptide- The University of Medicine
cochleate and Dentistry of New Jersey
immunotherapeutics methods and Albany Medical College
of immunizing using the
same
------------------------ ----------------- ---------------- ---------------------------- -----------------------------
US04,871,488 10/03/1989 10/03/2006 Reconstituting viral Albany Medical College
glycoproteins into
largephospholipid vesicles
------------------------ ----------------- ---------------- ---------------------------- -----------------------------
US04,663,161 05/05/1987 4/22/2005 Liposome methods and Albany Medical College
compositions
------------------------ ----------------- ---------------- ---------------------------- -----------------------------
1 We also co-own U.S. Patent 06,340,591 with the University of Maryland and
University of Medicine and Dentistry of New Jersey, dealing with gene therapy
which has no relation with either drug delivery or vaccines as described herein.
Our interest in the intellectual property is subject to and burdened by various
royalty payment obligations and by other material contractual or license
obligations.
13
In general, the patent position of biotechnology and pharmaceutical firms is
frequently considered to be uncertain and involve complex legal and technical
issues. There is considerable uncertainty regarding the breadth of claims
allowed in such cases and the degree of protection afforded under such patents.
While we believe that our intellectual property position is sound and that we
can develop our new drug delivery technology and our HIV therapy, we cannot
provide any assurances that our patent applications will be successful or that
our current or future intellectual property will afford us the desired
protection against competitors. It is possible that our intellectual property
will be successfully challenged or that patents issued to others may preclude us
from commercializing our drugs. We are aware of two issued United States patents
dealing with lipid formulations of Amphotericin B products. The first of these
patents, United States Patent No. 04,978,654, claims an Amphotericin B liposome
product. We do not believe that our patent or technology are in conflict with
this existing patent, although there can be no assurance that a court of law in
the United States' patent authorities might determine otherwise. Our belief is
based upon the fact that our cochleate product does not contain liposomes, which
appears to be the basis for the existing patent. The second of these patents,
United States Patent No. 05,616,334, claims a composition of a lipid complex
containing Amphotericin B defined during prosecution as a ribbon structure. Our
nano-encapsulation technology uses cochleates which are not ribbon structures.
Accordingly, we do not believe that we require a license under this patent. If a
court were to determine that we infringe either of these patents, we might be
required to seek a license to commercialize Amphotericin B products. There can
be no assurance that we would be able to obtain a license from either patent
holder. In addition, if we were unable to obtain a license, or if the terms of
the license were onerous, there may be a material adverse effect upon our
business plan to commercialize these products.
Most of the inventions claimed in our patents were made with the United States
government support. Therefore, the United States government might have certain
rights in the technology, which could be inconsistent with our plans for
commercial development of products and/or processes. We believe to the extent
the United States government would have rights in our licensed technology due to
their funding, we have to either obtain a waiver from the United States
government relating to the United States government's rights in the technology,
or have agreements with the United States government which would grant us
exclusive rights.
We also rely on trade secrets and confidentiality agreements with collaborators,
advisors, employees, consultants, vendors and other service providers. We cannot
assure you that these agreements will not be breached or that our trade secrets
will not otherwise become known or be independently discovered by competitors.
Our business would be adversely affected if our competitors were able to learn
our secrets or if we were unable to protect our intellectual property.
History of Our Technology
Below is a table summarizing technology development milestones:
------------------ -------- ------------------------------------------------------------------------------------
April 1995 BDS obtained the worldwide exclusive rights to the Bioral Cochleate
Technology owned by the Universities.
------------------ -------- ------------------------------------------------------------------------------------
September 1995 BDS was awarded a vaccine research grant from Wyeth Lederle Vaccines
------------------ -------- ------------------------------------------------------------------------------------
September 1995 BDS established a Research Agreement with the University of Medicine
and Dentistry of New Jersey
------------------ -------- ------------------------------------------------------------------------------------
June 1996 BDS established research and development, and License Agreement for
Vaccines with Wyeth Lederle Vaccines which expired in December 1999.
14
------------------ -------- ------------------------------------------------------------------------------------
August 1996 BDS signed a Material Transfer Agreement ("MTA") and started
collaboration with the University of Maryland, Gene Therapy.
------------------ -------- ------------------------------------------------------------------------------------
July 1997 U.S Patent No. 5,643,574 issued to the Universities. PROTEIN - OR
PEPTIDE-COCHLEATE VACCINES
------------------ -------- ------------------------------------------------------------------------------------
September 1997 BDS expanded its scientific and administrative staff and moved to
new laboratories
------------------ -------- ------------------------------------------------------------------------------------
November 1997 Initiated on-going collaboration with Public Health Research
Institute of New York ("PHRI")
------------------ -------- ------------------------------------------------------------------------------------
February 1998 Initiated on-going National Institute of Health funded amphotericin
cochleate studies with University of Texas
------------------ -------- ------------------------------------------------------------------------------------
February 1998 AUS Patent No 689505 issued to the Universities. VACCINE & METHODS
OF IMMUNIZING
------------------ -------- ------------------------------------------------------------------------------------
November 1998 U.S Patent No. 5,834,015, issued to the Universities. AUTOGENOUS
VACCINE (HIV)
------------------ -------- ------------------------------------------------------------------------------------
November 1998 U.S Patent No. 5,840,707 issued to the Universities. STABILIZING AND
DELIVERY MEANS OF BIOLOGICAL MOLECULES
------------------ -------- ------------------------------------------------------------------------------------
March 1999 Moved into current 8,000 square foot facility on the campus of the
University of Medicine and Dentistry of New Jersey.
------------------ -------- ------------------------------------------------------------------------------------
July 1999 Awarded Phase I SBIR for Amphotericin Cochleates
------------------ -------- ------------------------------------------------------------------------------------
September 1999 Awarded Phase I SBIR for Cochleate Gene Therapy
------------------ -------- ------------------------------------------------------------------------------------
November 1999 U.S Patent No. 5,994,318 issued to the Universities. COCHLEATE
DELIVERY VEHICLES
------------------ -------- ------------------------------------------------------------------------------------
December 1999 Signed a MTA and started an on-going collaboration in drug delivery
with a major pharmaceutical company under a non-disclosure agreement
------------------ -------- ------------------------------------------------------------------------------------
April 2000 Signed a MTA and started an on-going collaboration in drug delivery
with a major pharmaceutical company under a non-disclosure agreement.
------------------ -------- ------------------------------------------------------------------------------------
June 2000 Initiate an on-going collaboration with the National Cancer Institute,
Drug Delivery.
------------------ -------- ------------------------------------------------------------------------------------
October 2000 Initiated an on-going collaboration with the Institute for Tuberculosis
Research, University of Illinois of Chicago, drug delivery.
------------------ -------- ------------------------------------------------------------------------------------
November 2000 AUS Patent No 722,647 to the Universities. AUTOGENOUS VACCINE (HIV)
------------------ -------- ------------------------------------------------------------------------------------
November 2000 U.S Patent No. 6,153,217 issued to BDS and the University of Medicine
and Dentistry of New Jersey. NANOCOCHLEATE FORMULATIONS. Initiate
process for preparation of IND for amphotericin B cochleates
------------------ -------- ------------------------------------------------------------------------------------
December 2000 U.S Patent No. 6,165,502, issued to the Universities. AUTOGENOUS
VACCINE (cancer etc.)
------------------ -------- ------------------------------------------------------------------------------------
January 2001 Signed a MTA and started an on-going collaboration with a major
pharmaceutical company under a non-disclosure agreement in drug delivery
------------------ -------- ------------------------------------------------------------------------------------
April 2001 Establish a MTA and started an on-going collaboration with Utrecht
Institute for Pharmaceutical Sciences, and University Medical Center
Nijmegen, The Netherlands, to study mechanism of cochleates in drug delivery
15
------------------ -------- ------------------------------------------------------------------------------------
May 2001 Signed a MTA with PHRI, NY to develop the cochleates for the treatment of
Staphylococcus, drug delivery
------------------ -------- ------------------------------------------------------------------------------------
June 2001 Signed a MTA with EUR Erasmus University of Rotterdam, The Netherlands,
to develop the cochleates for the treatment of Staphylococcus, drug delivery
------------------ -------- ------------------------------------------------------------------------------------
June 2001 Joint-Venture agreement with Retina Pharma and Tatton Technology, LLC,
affiliates of a shareholder, director and officer of BDSI, to develop the
cochleates as nutraceuticals for neurodegenerative diseases.
------------------ -------- ------------------------------------------------------------------------------------
June 2001 Based upon the rating of our application, we believe we will
receive an award of $3,000,000 SBIR Phase II for Preclinical and Clinical
development of Amphotericin B cochleates
------------------ -------- ------------------------------------------------------------------------------------
July 2001 European Patent No. 722338, issued to the Universities and the University of
Maryland.
------------------ -------- ------------------------------------------------------------------------------------
September 2001 Award of $0.9 million, with an additional $1.8 million expected to be
awarded NIH(SBIR) Grant for Pre-clinical and Clinical development of
Amphotericin B cochleates.
------------------ -------- ------------------------------------------------------------------------------------
January 2002 US Patent N 06,340,591 issued on gene therapy "Integrative protein
DNA cochleate formulations and methods for transforming cells" to UMDNJ
and to the University of Maryland
------------------ -------- ------------------------------------------------------------------------------------
June 2002 Initial Public Offering
------------------ -------- ------------------------------------------------------------------------------------
August 2002 NIH Grant awarded in collaboration with M.D. Anderson Cancer Center to develop
an innovative HIV vaccine strategy
------------------ -------- ------------------------------------------------------------------------------------
September 2002 Evaluation agreement with a leading manufacturer of processed foods for
companion animals. The agreement grants the manufacturer a temporary
exclusive license in the veterinary field to evaluate the nanocochleate
delivery technology for applications to pet food.
------------------ -------- ------------------------------------------------------------------------------------
October 2002 Signed an evaluation agreement with a major pharmaceutical company
to design a cochleate formulation of one of their injectable compound.
------------------ -------- ------------------------------------------------------------------------------------
December 2002 Signed a license agreement with PPDI which granted PPDI the right
to apply BDSI's BioralTM nano-delivery technology to two therapeutic
products. The BDSI technology can be used by PPDI to encapsulate the
therapeutic products to enable oral delivery without the need for further
chemical modification.
------------------ -------- ------------------------------------------------------------------------------------
Competition
The biopharmaceutical industry in general is competitive and subject to rapid
and substantial technological change. Developments by others may render our
proposed technology, proposed drugs and HIV therapy under development
noncompetitive or obsolete, or we may be unable to keep pace with technological
developments or other market factors. Technological competition in the industry
from pharmaceutical and biotechnology companies, universities, governmental
entities and others diversifying into the field is intense and is expected to
increase. Below are some examples of companies seeking to develop potentially
competitive technologies. Many of these entities have significantly greater
research and development capabilities than do we, as well as substantially more
marketing, manufacturing, financial and managerial resources. These entities
represent significant competition for us. In addition, acquisitions of, or
investments in, competing pharmaceutical or biotechnology companies by large
corporations could increase such competitors' research, financial, marketing,
manufacturing and other resources.
16
While many development activities are private, and therefore we cannot know what
research or progress has actually been made, we are not aware of any other drug
delivery technology using a naturally occurring drug delivery vehicle (carrier)
that can be used to simultaneously address two important clinical goals; oral
delivery of drugs that normally require injection and targeted cell delivery
once the drug is in the body.
Included amongst companies which we believe are developing potentially
competitive technologies are Emisphere (NASDAQ: EMIS), CIMA LABS INC. (NASDAQ:
CIMA) and Novavax, Inc. (NASDAQ: NVAX), each a publicly-traded company, and
Nobex Corporation, a privately-held company. We believe that these potential
competitors are seeking to develop and commercialize technologies for the oral
delivery of drugs which may require customization for various therapeutics or
groups of therapeutics. While our information concerning these competitors and
their development strategy is limited, we believe our technology can be
differentiated because our cochleate technology is seeking to deliver a
potential broad base of water soluble and water insoluble (fat of lipid soluble)
compounds with limited customization for each specific drug.
We believe that our technology may have cell-targeted delivery attributes as
well. Additional companies which are developing potentially competitive
technologies in this area may include Valentis, Inc. (NASDAQ: VLTS) and Enzon,
Inc. (NASDAQ: ENZN), both publicly-traded companies, which we believe may be
seeking to develop technologies for cell-targeted delivery of drugs. While we
have limited information regarding these potential competitors and their
development status and strategy, we believe that our technology may be
differentiated because unlike these potential competitors, we seek to use our
cochleate to encapsulate the therapeutic to achieve drug delivery into the
interior of the cells such as inflammatory cells.
Although the competitors mentioned above are developing drug delivery techniques
conceptually similar to ours with respect to encapsulation, or more specifically
"nano-encapsulation," we believe that our approach is different, proprietary and
protected under our licensed and patented technology. One primary way we can be
differentiated from our competitors is in our approach of using naturally
occurring substances to form a cochleate which encapsulates the drug in a
scroll-like multilayered delivery vehicle. We believe that competitors may also
be working on patient-specific therapies for cancer. However, we are not aware
of any competitors currently attempting to develop patient-specific therapies
for HIV. This does not, however, mean to imply that there are not any now or
that there will not be in the future. Vaccines can be used for prophylactic
(prevention of infection), or therapeutic (treatment following infection)
applications. The patient-specific therapeutic, which we are attempting to
develop, is intended to boost or alter the immune response in patients already
infected with HIV. For the most part, HIV vaccines in development, about which
we are aware, are being targeted specifically to prevent infection, however,
some of these vaccines may also prove useful for therapeutic applications. As
such, these could prove to be competitive with our autologous therapeutic.
Our drug delivery technology, specific drugs encapsulated with our drug delivery
technology and HIV autologous immunotherapeutics must compete with other
existing technologies and/or technologies in development. Such potential
competitive technologies may ultimately prove to be safer, more effective or
less costly than any drugs which we are currently developing or may be able to
develop. Additionally, our competitive position may be materially affected by
our ability to develop or successfully commercialize our drugs and technologies
before any such competitor.
17
Manufacturing
During drug development and the regulatory approval process, we plan to rely on
third-party manufacturers to produce our compounds for research purposes and for
pre-clinical and clinical trials. We are now using a US-based pre-clinical,
Phase I and Phase II manufacturing partner for scale-up of our formulation
(University of Kentucky). To date, we have not entered into manufacturing
arrangements for any other intended BioralTM product. As our intended products
near market introduction, we intend to outsource manufacturing to third party
manufacturers, which comply with the FDA's applicable Good Manufacturing
Practices. While we believe that such commercial manufacturing arrangements may
be available, no such relationships have been establish to date. We have and
intend to purchase component raw materials from various suppliers. As our
intended products near market introduction, we intend to seek multiple suppliers
of all required components although there may not actually be more than one at
that time.
Sales and Marketing
Our marketing strategy, assuming completion of our drug delivery technology and
product development and regulatory approval, is to market each of our approved
orally delivered products under the BioralTM brand name. Marketing may be
conducted through a wide range of potential arrangements such as licensing,
direct sales, co-marketing, joint venture and other arrangements. Such
arrangements may be with large or small pharmaceutical companies, general or
specialty distributors, biotechnology companies, physicians or clinics, or
otherwise. We have a non-exclusive distribution arrangement with Biotech
Specialty Partners, LLC. BSP is an early-stage alliance of specialty
pharmaceutical and biotechnology companies.
Government Regulation
The manufacturing and marketing of any drug encapsulated in our drug delivery
technology, our autologous HIV therapeutic and our related research and
development activities are subject to regulation for safety, efficacy and
quality by numerous governmental authorities in the United States and other
countries. We anticipate that these regulations will apply separately to each
drug to be encapsulated by us in our drug delivery technology. We believe that
complying with these regulations will involve a considerable level of time,
expense and uncertainty.
In the United States, drugs are subject to rigorous federal regulation and, to a
lesser extent, state regulation. The Federal Food, Drug and Cosmetic Act, as
amended, and the regulations promulgated thereunder, and other federal and state
statutes and regulations govern, among other things, the testing, manufacture,
safety, efficacy, labeling, storage, record keeping, approval, advertising and
promotion of our drugs. Drug development and approval within this regulatory
framework is difficult to predict and will take a number of years and involve
the expenditure of substantial resources.
The steps required before a pharmaceutical agent may be marketed in the United
States include:
1. Pre-clinical laboratory tests, in vivo pre-clinical studies and
formulation studies;
2. The submission to the FDA of an Investigational New Drug Application
(IND) for human clinical testing which must become effective before
human clinical trials can commence;
3. Adequate and well-controlled human clinical trials to establish the
safety and efficacy of the product;
18
4. The submission of a New Drug Application or Biologic License
Application to the FDA; and
5. FDA approval of the New Drug Application or Biologic License
Application prior to any commercial sale or shipment of the product.
In addition to obtaining FDA approval for each product, each domestic
product-manufacturing establishment must be registered with, and approved by,
the FDA. Domestic manufacturing establishments are subject to biennial
inspections by the FDA and must comply with the FDA's Good Manufacturing
Practices for products, drugs and devices.
Pre-clinical Trials
Pre-clinical testing includes laboratory evaluation of chemistry and
formulation, as well as tissue culture and animal studies to assess the
potential safety and efficacy of the product. Pre-clinical safety tests must be
conducted by laboratories that comply with FDA regulations regarding Good
Laboratory Practices. No assurance can be given as to the ultimate outcome of
such pre-clinical testing. The results of pre-clinical testing are submitted to
the FDA as part of an IND and are reviewed by the FDA prior to the commencement
of human clinical trials. Unless the FDA objects to an IND, the IND will become
effective 30 days following its receipt by the FDA.
We intend to largely rely upon contractors to perform pre-clinical trials.
Clinical Trials
Clinical trials involve the administration of the new product to healthy
volunteers or to patients under the supervision of a qualified principal
investigator. Clinical trials must be conducted in accordance with Good Clinical
Practices under protocols that detail the objectives of the study, the
parameters to be used to monitor safety and the efficacy criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the IND.
Further, each clinical study must be conducted under the auspices of an
independent institutional review board at the institution where the study will
be conducted. The institutional review board will consider, among other things,
ethical factors, the safety of human subjects and the possible liability of the
institution. Compounds must be formulated according to Good Manufacturing
Practices.
Clinical trials are typically conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the product into
healthy human subjects, the drug is tested for safety (adverse side effects),
absorption, dosage tolerance, metabolism, bio-distribution, excretion and
pharmacodynamics (clinical pharmacology). Phase II is the proof of principal
stage and involves studies in a limited patient population in order to:
o Determine the efficacy of the product for specific, targeted
indications;
o Determine dosage tolerance and optimal dosage; and
o Identify possible adverse side effects and safety risks.
When there is evidence that the product may be effective and has an acceptable
safety profile in Phase II evaluations, Phase III trials are undertaken to
further evaluate clinical efficacy and to test for safety within an expanded
patient population at geographically dispersed multi-center clinical study
sites. Phase III frequently involves randomized controlled trials and, whenever
possible, double blind studies. We, or the FDA, may suspend clinical trials at
any time if it is believed that the individuals participating in such trials are
being exposed to unacceptable health risks.
19
We intend to rely upon third party contractors to advise and assist us in our
clinical trials. We have entered into an agreement with Pharma Research, Inc.,
Wilmington, Delaware, to assist in the preparation and filing of our IND with
regard to Phase I clinical trials and upon acceptance to potentially oversee
clinical trials of our "nano-encapsulated" Amphotericin B. Under the agreement,
Pharma-Research, Inc. would provide scientific and other professional personnel
to assist us in drafting and submitting the IND. We have been given an estimate
of the total cost of the project which is subject to variables such as actual
time spent on the project. However, at this time, we believe the total project
will approximate $100,000. Furthermore, this agreement may be terminated at any
time by either party. We have not established similar relationships regarding
anticipated clinical trials for any other intended BioralTM product.
New Drug Application and FDA Approval Process
The results of the pharmaceutical development, pre-clinical studies and clinical
studies are submitted to the FDA in the form of a New Drug Application for
approval of the marketing and commercial shipment of the product. The testing
and approval process is likely to require substantial time and effort. In
addition to the results of preclinical and clinical testing, the NDA applicant
must submit detailed information about chemistry and manufacturing and controls
that will determine how the product will be made. The approval process is
affected by a number of factors, including the severity of the disease, the
availability of alternative treatments and the risks and benefits demonstrated
in clinical trials. Consequently, there can be no assurance that any approval
will be granted on a timely basis, if at all. The FDA may deny a New Drug
Application if applicable regulatory criteria are not satisfied, require
additional testing or information or require post-marketing testing (Phase IV)
and surveillance to monitor the safety of a company's products if it does not
believe the New Drug Application contains adequate evidence of the safety and
efficacy of the drug. Notwithstanding the submission of such data, the FDA may
ultimately decide that a New Drug Application does not satisfy its regulatory
criteria for approval. Moreover, if regulatory approval of a drug is granted,
such approval may entail limitations on the indicated uses for which it may be
marketed. Finally, product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing. Post approval studies may be conducted to explore further
intervention, new indications or new product uses.
Among the conditions for New Drug Application approval is the requirement that
any prospective manufacturer's quality control and manufacturing procedures
conform to Good Manufacturing Practices and the requirement specifications of
the approved NDA. In complying with standards set forth in these regulations,
manufacturers must continue to expend time, money and effort in the area of drug
and quality control to ensure full technical compliance. Manufacturing
establishments, both foreign and domestic, also are subject to inspections by or
under the authority of the FDA and by other federal, state or local agencies.
Additionally, in the event of non-compliance, FDA may issue warning letters and
seek criminal and civil penalties, enjoin manufacture, seize product or revoke
approval.
International Approval
Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of commercial sales of the drug in such countries. The requirements
governing the conduct of clinical trials and drug approvals vary widely from
country to country, and the time required for approval may be longer or shorter
than that required for FDA approval. Although there are some procedures for
unified filings for certain European countries, in general, each country at this
time has its own procedures and requirements.
20
Other Regulation
In addition to regulations enforced by the FDA, we are also subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and potential future federal, state or local
regulations. Our research and development may involve the controlled use of
hazardous materials, chemicals, and various radioactive compounds. Although we
believe that our safety procedures for handling and disposing of such materials
comply with the standards prescribed by state and federal regulations, the risk
of accidental contamination or injury from these materials cannot be completely
eliminated. In the event of any accident, we could be held liable for any
damages that result and any such liability could exceed our resources.
Employees
As of March 20, 2003, we had nineteen full-time employees, of which twelve are
scientists and seven are administrative/accounting and IT. Six of our scientists
have Ph.D. degrees and 4 have medical degrees. None of our employees are covered
by collective bargaining agreements. From time to time, we also employ
independent contractors to support our engineering and support and
administrative functions. We consider relations with our employees to be good.
Each of our current scientific personnel has entered into confidentiality and
non-competition agreements with us.
Item 2. Description of Property.
We conduct our operations in laboratory and administrative facilities on a
single site located on the campus of the University of Medicine and Dentistry of
New Jersey. Pursuant to a five year lease agreement with the university ending
2005, we occupy a total of approximately 8,000 square feet. The monthly rent is
$3,340 in 2001, $3,840 in 2002, $4,340 in 2003, $4,840 in 2004 and $5,340 in
2005 plus agreed payments for graduate student assistants and supplies used by
us. During the fourth quarter of 2002, the graduate students transferred to our
payroll, including one who completed her Ph.D., and the monthly payments
directly to UMDNJ were reduced accordingly. The payments for rent and supplies
are expected to be approximately $75,000 annually. The terms of the lease allows
us flexibility of terminating the lease arrangement and relocating to a new
space better suited for our long-term space requirements. Our ability to
terminate is without a penalty provided that we give prior written notice.
Item 3. Legal Proceedings.
We may, from time to time, be involved in actual or potential legal proceedings
that we consider to be in the normal course of our business. We do not believe
that any of these proceedings will have a material adverse effect on our
business.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
21
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Our common stock and Class A warrants are listed for quotation on the Nasdaq
SmallCap Market under the symbols "BDSI" and "BDSIW" respectively. Also, such
securities are listed on the Boston Stock Exchange under the same symbols. The
range of reported high and reported low bid prices per share for our common
stock and warrants for each fiscal quarter since our initial public offering in
June, 2002, as reported by the Nasdaq SmallCap Market, is set forth below. The
quotations merely reflect the prices at which transactions were proposed, and do
not necessarily represent actual transactions.
Quarterly Common Stock/Warrant Price Ranges
Quarter Ended: Common Stock Warrants
------------- ------------ --------
High Low High Low
------ ----- ------ -----
September 30, 2002 $3.80 $1.25 $1.20 $0.40
December 30, 2002 $2.95 $1.25 $0.70 $0.15
As of March 20, 2003, we had approximately 233 holders of record of our common
stock. No cash dividends have been paid on the common stock to date. We
currently intend to retain any earnings for further business development.
We are intending to distribute to our stockholders, as a dividend, rights to
purchase directly from us Class B membership shares of our subsidiary, Bioral
Nutrient Delivery, LLC, which Class B membership shares we currently own. Our
plan is to initially distribute rights to purchase approximately 50% of the
economic interests in BND and then, on a quarterly basis for a three (3) year
period, distribute additional rights to purchase additional Class B membership
shares from us. In February, 2003, BND filed a registration statement with the
SEC to register such rights and such Class B membership, and we will not declare
any such dividend of rights until such registration statement is declared
effective, for no which assurances can be given.
Securities Authorized for Issuance Under Equity Compensation Plans
Number of securities
to be issued upon Weighted-average
exercise of exercise price of Number of securities
outstanding options, outstanding options, remaining available
Plan category warrants and rights warrants and rights for future issuance
------------- ------------------- ------------------- ------------------
(a) (b) (c)
Equity compensation
plans approved by
security holders 572,082 $7.69 -0-
Equity compensation
plans not approved by
security holders (*) 717,301 $4.22 ---
-----------------------------------------------------------------------------
Total 1,289,383 $5.76 -0-
22
(*) The options detailed in this row were authorized for issuance by our board
of directors and pursuant to increases in the number of shares available for
issuance under our 2001 Stock Option Plan, which increase is subject to
stockholder approval. Such options are intended to be issued under our 2001
Stock Option Plan, as the same may be amended and approved by our stockholders.
Recent Sales of Unregistered Securities
As part of the merger with BioDelivery Sciences, Inc. consummated in January
2002, we issued 520,313 shares of common stock to the BioDelivery Sciences, Inc.
stockholders.
In addition, during 2002 we issued options to purchase our common stock to
members of our board of directors (372,536 shares in the aggregate), to members
of our Scientific Advisory Board (33,484 shares in the aggregate), our outside
legal counsel (25,000 shares), consultants (12,563 in the aggregate) and, in
connection with a revision to our agreements with The University of Medicine and
Dentistry of New Jersey and Albany Medical College (75,000 shares each), for a
total of 593,583 options. There were no underwriters or placement agents
employed in connection with any of the transactions set forth above.
The issuances described above were deemed exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act as transactions
by an issuer not involving a public offering. Certain issuances described above
were deemed exempt from registration under the Securities Act in reliance on
Rule 701 promulgated thereunder as transactions pursuant to compensatory benefit
plans and contracts relating to compensation. The recipients of securities in
each such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about us or had access, through employment
or other relationships, to such information.
Use of Proceeds From Registered Securities
On June 24, 2002, the Securities and Exchange Commission declared our
Registration Statement on Form SB-2, Registration No. 333-72877, effective.
Commencing on June 25, 2002, and pursuant to such Registration Statement, we
conducted an offering consisting of 2,000,000 Units, with each Unit consisting
of (i) one share of common stock, par value $.001 per share, and (ii) one Class
A common stock purchase Warrant. Each Warrant entitles the owner to purchase one
share of our common stock at a price of $6.30 for a period of four years
commencing on June 24, 2003. The net offering proceeds we received, after
deducting the offering expenses, was $8,176,690. During the three month period
ended September 30, 2002, the underwriters exercised an over-allotment option
for 85,000 Units, resulting in net proceeds to the Company of $394,707. During
the quarterly period ended December 31, 2002, proceeds from such offering were
used for research and development and general working capital purposes.
23
Item 6. Management's Discussion and Analysis or Plan of Operation.
The following discussion and analysis of our financial condition and plan of
operations should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this Report. This discussion
and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. The actual results may differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including, but not limited to, those which are not within our control.
Limited Operating History; Background of Our Company
Until the current year, we were a development stage company. In late December,
2002, we signed our first license agreement, which was funded in January 2003.
We expect to continue research and development of our drug delivery technology,
and while we are seeking additional license agreements, which may include
up-front payments, we do not anticipate any revenues from the sale or
commercialization of our products under development (other than license fees)
within the next 12 months. The funding will come primarily from the sale of
securities, exercise of warrants, collaborative research agreements, including
pharmaceutical companies, grants from public service entities and government
entities.
In 2001, the National Institutes of Health awarded us a three-year Small
Business Innovation Research Grant, which is being utilized in our research and
development efforts. NIH awarded to us and fully funded a 2001 grant of
$883,972, and a 2002 grant of $814,398, of which we have received $370,000
through December 31, 2002 and expect to receive the remainder through June 2003.
The final year grant of approximately $989,000 is anticipated to be fully
funded, subject to availability and satisfactory progress of the project. This
grant is more fully discussed below under Liquidity and Capital Resources.
Although there can be no assurance that the full grant will be realized, we
expect to receive a total of approximately $2.7 million related to our initial
application for the grant through June 2004, assuming that we continue to
achieve positive results from the research. 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 by us in its subjective opinion, the total future expected funding
amounts noted above may be reduced or eliminated.
We have a limited history of operations, and while we received in January 2003
an initial payment for licensing our technology, we anticipate that our
quarterly results of operations will fluctuate significantly for the foreseeable
future. Prior to our October 2000 acquisition of a majority interest in
BioDelivery Sciences, Inc., we had no operations. We believe period-to-period
comparisons of our operating results should not be relied upon as predictive of
future performance. Our prospects must be considered in light of the risks,
expenses and difficulties encountered by companies maturing in commercialization
of their technologies, particularly companies in new and rapidly evolving
markets such as pharmaceuticals, drug delivery and biotechnology. For the
foreseeable future, we must, among other things, seek regulatory approval for
and commercialize our proposed drugs, which may not occur. We may not be able to
appropriately address these risks and difficulties. We may require additional
funds to complete the development of our drugs and to fund expected operations
in the next several years.
For the Year Ended December 31, 2002 Compared to the Year Ended December 31,
2001
Sponsored Research Revenue. During the years ended December 31, 2002 and 2001,
we recognized sponsored research revenue of $828,000 and $478,000, respectively.
From the 2002 NIH Grant award of $814,000, $370,000 was received in calendar
2002, and the balance is expected through June 2003. The 2001 revenue amount was
24
derived from the NIH Grant awarded to us in 2001. The total grant amount was
$884,000, of which approximately $479,000 was received through December 31, 2001
and the balance was received in calendar 2002. While no assurances can be made,
assuming positive results are achieved through our sponsored research
activities, we expect to receive a total of approximately $2.7 million through
2004 related to our initial application for the grant.
Research and Development Expenses. During the years ended December 31, 2002 and
2001, research and development expenses totaled $1.5 million and $1.7 million,
respectively. The scientific staff continued to work toward increased
development and application of Bioral(TM) cochleate technology and other
drug-related areas. Funding of this research was obtained through sponsored
research revenue, common stock issuance, initial public offering funding in June
2002 and line of credit borrowings through the offering period. Research and
development expenses generally include salaries for key scientific personnel,
research supplies, facility rent, lab equipment depreciation and a portion of
overhead operating expenses and other costs. Given the multiple uses of
personnel and resources for different projects, separate tracking of expenses on
a line item basis was historically not done for accounting purposes until the
latter part of 2002 when a new accounting system was implemented.
General and Administrative Expenses. During the years ended December 31, 2002
and 2001, general and administrative expenses totaled $1.7 million and $.7
million, respectively. The increase is primarily due to increased staffing and
administrative costs (such as travel costs to generate license agreements and
legal and accounting costs following the initial public offering). Stock
compensation expense of $0.7 million and $2.2 million in calendar 2002 and 2001
respectively, related to the elimination of the restrictions on the permanent
discount redeemable common stock, and contractual obligations to former
shareholders of BioDelivery Sciences, Inc., as well as compensation to employees
and consultants who were granted stock options. Also included in general and
administrative costs are legal settlement costs, legal and professional fees,
and other costs including office supplies, conferences, travel costs, executive
personnel costs, consulting fees, website update and development and business
development costs.
Interest Income (Expense), Net. During the years ended December 31, 2002 and
2001, interest income (expense), net totaled $17,000 and $(22,000),
respectively. The increase in net interest income is primarily due to the public
offering, and investment of liquid funds, as well as payoff of all bank debt
following the offering in June 2002.
Income Tax Benefit. We recognized an income tax benefit of $55,000 and $18,000
in 2002 and 2001, respectively. While net operating losses were generated during
both years presented, we did not recognize any benefit associated with these
losses. We had federal and state net operating loss carryforwards of $5.4
million at December 31, 2002. The federal net operating loss carryforwards will
expire beginning in 2020, if not utilized. The state operating loss
carryforwards will expire beginning in 2007, if not utilized. Financial
Accounting Standards Board Statement No. 109 provides for the recognition of
deferred tax assets if realization 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 financed our operations primarily from the sale of our
convertible preferred stock and common stock, until the initial public offering
in June 2002. From inception through March 31, 2002, we raised approximately
$1.8 million, net of issuance costs, through private placements or convertible
preferred stock and common stock financings. On April 1, 2001, we issued 137,300
shares of common stock in consideration for payment in full of the approximate
$500,000 payable to the University of Medicine and Dentistry of New Jersey due
25
through March, 2001. Our June, 2002 public offering, net of offering costs of
$2.4 million, and including the underwriter's over-allotment (the "green shoe"),
raised approximately $8.6 million. At December 31, 2002, we had cash and cash
equivalents totaling approximately $5.2 million. At December 31, 2001 we had
cash and cash equivalents totaling approximately $76,000.
In 2001, the National Institutes of Health awarded us a three-year Small
Business Innovation Research Grant, which is being utilized in our research and
development efforts. NIH awarded us, and fully funded a 2001 grant of $884,000,
and a 2002 grant of $814,398, of which we have received approximately $370,000
through December 31, 2002 and expect to receive the remainder through June 2003.
Additionally, this award refers to funding levels of $989,000 that we expect to
be awarded in 2003 (and paid through June 2004), subject to availability and
satisfactory progress of the project in NIH's opinion. Therefore, we expect to
receive a total of approximately $2.7 million related to our initial application
for the grant through June 2004, assuming that we continue to achieve positive
results from the research. The grant is subject to provisions for monitoring set
forth in NIH Guide for Grants and Contracts dated February 24, 2000. If NIH
believes that satisfactory progress is not achieved in its opinion, the future
funding noted above may be reduced or eliminated in its sole discretion.
We used $2.5 million of cash for operations in 2002 compared to $1.6 million of
cash used for operations in 2001. Until the offering in June 2002, we paid
limited compensation to certain executive employees, including the CEO and
chairman of the board. While members of the board of directors and other
executive officers have received compensation in the form of stock options, we
expect that increases in their compensation will occur in future periods
commensurate with the level of services rendered.
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. As of December 31, 2002, we
had expended approximately $325,000 toward equipment purchases, including
deposits on equipment expected to be delivered by March 31, 2003. We expect to
have approximately $600,000 to $700,000 in total equipment purchases and
facility improvements by mid-summer 2003. We may not fully utilize this line in
2003.
We have incurred significant net losses and negative cash flows from operations
since our inception. The initial public offering allowed us to pay all of our
outstanding debts, including all bank debt, and outstanding obligations
resulting from a dispute with a former shareholder and officer. As of December
31, 2002, we had stockholders' equity of $5.8 million, versus a deficit of
$209,000 at December 31, 2001.
We anticipate that cash used in operations and our investment in facilities will
increase significantly in the future as we research, develop, and, potentially,
manufacture our proposed 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, and
not on the marketing, production or sale of FDA approved products.
We formed a wholly-owned Delaware limited liability company subsidiary in
January 2003, Bioral Nutrient Delivery, LLC, and we will sign an exclusive
sub-license to BND for the purpose of exploiting our cochleate technology in the
processed food and beverage industry, as opposed to the pharmaceutical industry
that is our focus. As part of the business plan for BND, our shareholders will
have the right to purchase interests in BND directly from us at fair-market
value, based on independent third-party appraisal. Over time (approximately
three years) we will reduce our ownership in BND to approximately 10%, with the
26
balance owned by our stockholders, who we expect to purchase membership
interests in BND. We will be the managing member of BND, and will exercise
complete management activity and control of BND. Funds from the exercise of
those rights, at fair market value, will inure to us, as will 8% royalties that
will be paid to BDSI, as BND transacts its business in the food and beverage
industry. In February, 2003, we made an unsecured loan to BND in the amount of
$500,000 to cover organization expenses and initial working capital
requirements. The loan accrues interest at a rate of 4.85% annually, to be paid
back solely from 10% of any royalty revenue that may be received by BND, with
payments first applied to interest, then to principal. We are under no
obligation to make any capital contributions or any additional loan funds to BND
beyond the initial $500,000. We intend to enter into a management services and
administrative agreement with BND, pursuant to which certain of our officers and
employees will provide services and space to BND. This agreement will provide
that for a period of one year, we will not require repayment for allocated
officer and employee salaries or certain other general and administrative costs.
We believe that our existing cash and cash equivalents, together with available
equipment financing and the net proceeds of this offering will be sufficient to
finance our planned operations and capital expenditures through at least the
next 24 months. While we plan to manage our expenditures for development in
accordance with the prior statement, we are currently unable to estimate the
costs to complete or the completion dates of our current projects. Accordingly,
we may be required to raise additional capital through a variety of sources,
including:
o the public equity market, including the sale of membership interests
in BND, as described above ;
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
technologies, drugs 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.
New Accounting Pronouncements
In July, 2001, the Financial Accounting Standards Board (FASB) issued 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 this Statement apply to goodwill and other intangible assets acquired between
July 1, 2001, and the effective date of SFAS 142. The adoption of these
standards did not have a material impact on our financial statements.
27
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement address 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. We adopted this standard effective January 1, 2002, which did
not have any material effect on our financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which (i) amends SFAS 123, Accounting
for Stock-Based Compensation, to provide alternative methods of transition for
an entity that voluntarily changes to the fair value based method of accounting
for stock-based employee compensation (ii) amends the disclosure provisions of
SFAS 123 to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation and (iii) requires disclosure about those effects in
interim financial information. Items (ii) and (iii) of the new requirements in
SFAS 148 are effective for financial statements for fiscal years ending after
December 15, 2002. We have adopted the reporting requirements of item (ii) and
will include the reporting requirements of item (iii) beginning in our first
interim period after December 15, 2002.
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirement for Guarantors, including Indirect
Guarantors of Indebtedness to Others ("FIN 45"). FIN 45 creates new disclosure
and liability recognition requirements for certain guarantees, including
obligations to stand ready to perform. The initial recognition and measurement
requirements of FIN 45 are effective prospectively for guarantees issued or
modified after December 31, 2002, and the disclosure requirements are effective
for financial statement periods ending after December 15, 2002. In accordance
with FIN 45, we have disclosed guarantee information.
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 and Research and Development Expenses
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. Research and development expenses are charged to operations
as incurred.
Revenues may also include nonrefundable technology license fees and milestone
payments. The non-refundable license fees are generally up-front payments for
the initial license of and access to our technology. For nonrefundable license
fees received at the initiation of license agreements for which the Company has
an ongoing research and development commitment, we defer these fees and
recognize 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, we recognize revenue upon delivery of the technology. In addition to
license fees, we may also generate revenue from time to time in the form of
milestone payments. Milestone payments are only received and recognized as
28
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.
Stock Compensation
We have historically compensated certain employees, directors and consultants
with common stock, common stock options or warrants as a portion of their total
compensation. The valuation of the underlying award or the related service
generally requires estimates and judgment with regard to assumptions applicable
to the award. Those assumptions include management's estimates of the fair value
of the services received and assumptions underlying the valuation of equity
securities, such as stock volatility and estimated lives of the stock based
award.
Income Taxes
Based on estimates of future taxable losses, management determined that a
valuation allowance of $2.2 million was required for our deferred tax assets as
of December 31, 2002. If these estimates prove inaccurate, a change in the
valuation allowance could be required in the future. This valuation allowance
was determined based on the uncertainty regarding our ability to generate
adequate future taxable income during the loss carryforward period.
Asset Impairment
We review long-lived assets and licenses for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset might not
be recoverable. If indicators of impairment were present, we would evaluate the
carrying value of property and equipment and licenses in relation to estimates
of future undiscounted cash flows. These undiscounted cash flows and fair values
are based on judgment and assumptions.
Item 7. Financial Statements.
Our Consolidated Financial Statements and Notes thereto and the report of Grant
Thornton LLP, our independent certified public accountant, are set forth on
pages F-1 through F-19 of this Report.
BIODELIVERY SCIENCES INTERNATIONAL, INC.
Consolidated Financial Statements
Report of Independent Certified Public Accountants..................................................F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001........................................F-3
Consolidated Statements of Operations for the years ended December 31, 2002 and 2001................F-4
Consolidated Statement of Stockholders' Equity for the years ended December 31, 2002 and 2001.......F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2002 and 2001................F-6
Notes to Consolidated Financial Statements..........................................................F-7
29
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
Our directors and executive officers and their ages as of March 21, 2003 are as
follows:
------------------------------------------- ---------- ----------------------------------------------------------
Name Age Position(s) Held
------------------------------------------- ---------- ----------------------------------------------------------
Francis E. O'Donnell, Jr., M.D. 53 President, Chief Executive Officer, Chairman and Director
------------------------------------------- ---------- ----------------------------------------------------------
Raphael J. Mannino, Ph.D. 56 Executive Vice President, Chief Scientific Officer and
Director
------------------------------------------- ---------- ----------------------------------------------------------
James A. McNulty 52 Secretary, Treasurer and Chief Financial Officer
------------------------------------------- ---------- ----------------------------------------------------------
Donald L. Ferguson 54 Senior Executive Vice President
------------------------------------------- ---------- ----------------------------------------------------------
Christopher Chapman, M.D 50 Executive Vice President of Medical and Regulatory
Affairs and Director of New Business Development
------------------------------------------- ---------- ----------------------------------------------------------
Susan Gould-Fogerite, Ph.D. 50 Vice President and Director of Innovation and Discovery
------------------------------------------- ---------- ----------------------------------------------------------
L.M. Stephenson, Ph.D. 60 Director
------------------------------------------- ---------- ----------------------------------------------------------
William B. Stone 59 Director
------------------------------------------- ---------- ----------------------------------------------------------
James R. Butler 62 Director
------------------------------------------- ---------- ----------------------------------------------------------
John J. Shea 76 Director
------------------------------------------- ---------- ----------------------------------------------------------
Robert G.L. Shorr 49 Director
------------------------------------------- ---------- ----------------------------------------------------------
Alan Pearce 54 Director
------------------------------------------- ---------- ----------------------------------------------------------
There are no family relationships between any director, executive officer, or
person nominated or chosen to become a director or executive officer.
Francis E. O'Donnell, Jr., M.D., age 53, has been our Chief Executive
Officer, President, Chairman and Director on a full time basis since March 29,
2002 when Dr. O'Donnell executed an employment agreement to become our full-time
interim President and Chief Executive Officer. For more than the last five
years, Dr. O'Donnell has served as managing director of The Hopkins Capital
Group, an affiliation of limited liability companies which engage in business
development and venture activities. He has been Chairman of Laser Sight Inc.
(LASE), a publicly traded manufacturer of advanced refractive laser systems
since 1993. He is a co-founder and chairman of RetinaPharma Technologies, Inc.
30
which now includes Tatton Technologies, LLC, and a co-founder of Biotech
Specialty Partners, LLC, an alliance of specialty pharmacy and biotechnology
companies. Dr. O'Donnell is a graduate of The Johns Hopkins School of Medicine
and received his residency training at the Wilmer Ophthalmological Institute.
Dr. O'Donnell is a former professor and Chairman of the Department of
Ophthalmology, St. Louis University School of Medicine. Dr. O'Donnell holds 25
U.S. Patents. Dr. O'Donnell is the 2000 Recipient of the Jules Stein Vision
Award sponsored by Retinitis Pigmentosa International. Dr. O'Donnell's address
is 709 The Hamptons Lane, Chesterfield, MO 63017.
James A. McNulty, age 52, has served as our Secretary, Treasurer and Chief
Financial Officer on a part time basis (estimated to constitute approximately
80% of his time) since October 2000. Mr. McNulty has, since May 2000, also
served as Chief Financial Officer of Hopkins Capital Group, an affiliation of
limited liability companies which engage in venture activities. Hopkins Capital
Group is owned and controlled by Dr. Francis E. O'Donnell, Jr. Mr. McNulty has
performed accounting and consulting services as a Certified Public Accountant
since 1975. He co-founded Pender McNulty & Newkirk, which became one of
Florida's largest regional CPA firms, and was a founder/principal in two other
CPA firms, McNulty & Company, and McNulty Garcia & Ortiz. He served as CFO of
Star Scientific, Inc. from October 1998 to May 2000. From June 2000 through
January 2002 he served as CFO/COO of American Prescription Providers, Inc. He is
a principal in Pinnacle Group Holdings, a real estate development company
developing a major downtown Tampa destination entertainment complex. He is a
published co-author (with Pat Summerall) of Business Golf, the Art of Building
Relationships on the Links. Mr. McNulty is a graduate of University of South
Florida, a licensed Certified Public Accountant, and is a member of the American
and Florida Institutes of CPA's. Mr. McNulty's address is 4419 W. Sevilla
Street, Tampa, FL 33629.
Donald L. Ferguson, age 54, has been Senior Executive Vice President on a
part time basis since October 2000. Mr. Ferguson has been Chief Executive
Officer and principal owner of Land Dynamics, Inc., a developer of real estate
projects since its founding in 1979 and currently owns in excess of 20 real
estate properties. Mr. Ferguson is an investor in early stage technology and
biotechnology companies including Nanovision Technologies, Inc., Star
Scientific, Inc., BioKeys Pharmaceuticals, Inc. and PhotoVision Pharmaceuticals,
Inc. Mr. Ferguson holds an M.B.A. Degree from the University of Kansas and a
B.S. Degree in industrial engineering from Oklahoma State University.
Raphael J. Mannino, Ph.D., age 56, has been Executive Vice President and
Chief Scientific Officer since October 2000, and a Director since October 2001.
Dr. Mannino has served as President, CEO, Chief Scientific Officer, and a member
of the Board of Directors of BioDelivery Science, Inc. since its incorporation
in 1995. Dr. Mannino's previous experience includes positions as Associate
Professor, at the University of Medicine and Dentistry of New Jersey (1990 to
present), Assistant, then Associate Professor, Albany Medical College (1980 to
1990), and Instructor then Assistant Professor, Rutgers Medical School (1977 to
1980). His postdoctoral training was from 1973 to 1977 at the Biocenter in
Basel, Switzerland. Dr. Mannino received his Ph.D. in Biological Chemistry in
1973 from the Johns Hopkins University, School of Medicine.
Christopher Chapman, M.D., age 50, has been the Executive Vice President of
Medical and Regulatory Affairs and Director of New Business Development
(pharmaceuticals) on a part time basis since October 2000. Dr. Chapman received
his M.D. degree from Georgetown University in Washington, D.C. in 1987 where he
completed his internship in Internal Medicine. He completed a residency in
Anesthesiology and a fellowship in Cardiovascular and Obstetric Anesthesiology
at Georgetown University. Since 1995, Dr. Chapman has been a critical care
physician on the staff at Doctor's Community Hospital, Lanham, Maryland. He was
most recently President of Chapman Pharmaceutical Consulting. From 1995 to April
2000, Dr. Chapman was Executive Director, Medical Affairs, Quintiles Consulting
and a founding Co-Director of Quintiles BRI (QBRI) Medical Affairs, Drug Safety
31
and Medical Writing Departments. Susan Gould-Fogerite, Ph.D., age 50, has been
Vice President and Director of Innovation and Discovery since July 2002. She was
previously Executive Vice President of Business Development--Vaccines and Gene
Therapy from October 2000. Dr. Gould-Fogerite served as Vice President and
Secretary, and has been a member of the Board of Directors of BioDelivery
Sciences, Inc. since its incorporation in 1995. Dr. Gould-Fogerite's previous
experience includes her positions as Assistant Professor, at University Of
Medicine And Dentistry Of New Jersey , New Jersey Medical School (1991 to
present), and Research Instructor (1985 to 1988), then Research Assistant
Professor (1988-1990), at Albany Medical College. Dr. Gould-Fogerite received
her Ph.D. in Microbiology and Immunology from the Albany Medical College in
1985.
L.M. Stephenson, Ph.D., age 60, is a member of our board of directors.
Dr. Stephenson has been associated with the University of Medicine and Dentistry
of New Jersey since 1995 where he is currently the Vice President for Research
with responsibility over developing the research capability, research funding
and intellectual property of New Jersey's medical science campuses, including
three medical schools, dental, nursing and public health schools and a graduate
school of biomedical sciences. He also serves as the Acting Associate Dean for
Research of the New Jersey Medical School where he is temporarily responsible
for managing and reorganizing the Sponsored Projects Office. Dr. Stephenson also
currently serves as the Director of Patents and Licensing of the University of
Medicine and Dentistry of New Jersey where he is responsible for management of
the Intellectual Property Assets, including marketing of patents and
establishment of new ventures. Dr. Stephenson is a graduate of the University of
North Carolina where he earned a BS in chemistry and was awarded the Venable
Medal for outstanding senior in chemistry. Dr. Stephenson earned his Ph.D. in
chemistry from the California Institute of Technology where he earned the Kodak
Prize for outstanding chemistry graduate student and was an NSF Predoctoral
Fellow. Additionally, Dr. Stephenson was a Research Fellow at Harvard
University. Dr. Stephenson also serves on the board of directors of the
following institutions: Kessler Medical Rehabilitation & Research Corporation
(Non-Profit), University Heights Sciences Park (Non-Profit), New Jersey
Entrepreneurs Network, Rutgers Help Desk & Business Incubator, Crescent Genomics
and the New Jersey Research and Development Council.
William B. Stone, age 59, is a member of our board of directors. For
thirty years, until his retirement in October 2000, Mr. Stone was continuously
employed with Mallinckrodt Inc. For the last twenty years of his career, he held
positions of Vice President and Corporate Controller and Vice President and CIO
for 16 years and 4 years, respectively. Mr. Stone is a graduate of the
University of Missouri-Columbia where he earned BS and MA degrees in accounting,
and is a Certified Public Accountant.
James R. Butler, age 62, is a member of our board of directors. He is
currently a director of Durect Corporation and has served in this capacity since
July 1999. Mr. Butler is retired from ALZA Corporation where the last position
he held was President of Alza International and from which he retired in June
2001. Mr. Butler was employed at Alza from August 1993 to June 2001. Prior to
that, Mr. Butler worked at Glaxo Inc. for 23 years where the last position he
held was Vice President--General Manager of Corporate Division. He is currently
on the Board of Directors of Hematrope Pharmaceuticals and is the Chairman of
the Board of Directors of Respirics, Inc. In addition, he is also a Senior
Advisor/Principal to Apothogen, Inc., which is a start up company funded by J.P.
Morgan Partners, as well as Pharmaceutical Products Development, Inc. Mr. Butler
is on the Pharmacy School Board at the University of Florida and is on the Board
of Advisors at Campbell University, North Carolina. Mr. Butler is also a
principal in a start up pharmaceutical company called Apothogen Pharmaceuticals.
Mr. Butler earned a B.S. in marketing at the University of Florida.
John J. Shea, age 76, is a member of our board of directors. He is
currently the head of his own firm of John J. Shea & Associates and a Quality
Systems Adviser with Quintiles, a private consulting firm. Mr. Shea has been
employed at John J. Shea Associates since 1989. Mr. Shea has also served in the
32
capacity of Director of Quality Assurance which is responsible for the
implementation of quality assurance procedures in a number of public and private
companies. From 1987-1989, he served as Director of Quality Assurance at NeoRx
Corporation. Mr. Shea was also the Director of Corporate Quality Assurance at
Hexcel Corporation from 1980-1987. Mr. Shea has also served as the quality
assurance person for other companies including, Teledyne Relays, Ortho
Diagnostics, Inc. and Bio Reagents & Diagnostics, Inc. Mr. Shea earned a B.S. in
Chemistry at Bethany College and was enrolled in the Ph.D. Program at Kensington
University in California.
Robert G.L. Shorr, Ph.D., age 49, is a member of our board of directors. He is
currently President and CEO of Cornerstone Pharmaceuticals, a company focused on
novel tumor targeting drug delivery and novel anticancer agent technologies. He
is also on the faculty of State University of New York (SUNY) Stony Brook
Department of Biomedical Engineering where he serves as the Director of Business
Development for the Center for Advanced Technology State University of New York
at Stony Brook. He has served in that position since October 1998. As Director
of Business Development for the State University of New York at Stony Brook
Center for Biotechnology, Dr. Shorr has been responsible for working with
faculty and the university technology transfer office to establish grant funded
entrepreneurial programs for promising commercializable technology. From 1991 to
1998, Dr. Shorr served as Vice President Science and Technology and as Vice
President for Research and Development at Enzon Inc., a public company. Among
his many accomplishments, Dr. Shorr was responsible for management of the
co-development with Schering Plough of the product PEG INTRON A, which is now
approved in the US and Europe. Dr. Shorr also served as chief scientist for
another public company, United Therapeutics, Inc. since 1998 and continues to be
a consultant. Dr. Shorr was also Associate Director for Molecular Pharmacology
at SmithKline and French Upper Marion, PA; working under the direction of
Stanley T. Crooke, M.D., Ph.D. and President of World Wide Research and
Development. Dr. Shorr received his B.S. in Biology from the State University of
New York (Buffalo) in 1975, his D.I.C. from Imperial College of Science &
Technology in London, England in 1982, and his Ph.D., in Biochemistry from the
University of London in 1981.
Alan Pearce, age 54, is a member of our board of directors. He is
currently Senior Vice President, Financial Services of McKesson Corporation.
McKesson Corporation, a Fortune 50 company, is the leading provider of supply,
information and care management products and services designed to reduce costs
and improve quality across healthcare. Mr. Pearce has held his current position
since April 1999. Prior to this date he was treasurer of McKesson Corporation.
Mr. Pearce is a graduate of Georgia Institute of Technology , where he earned a
BS in Industrial Management and University of Texas, where he earned his MBA in
finance.
Scientific Advisory Board
We have established our Scientific Advisory Board as an additional scientific
and technical resource for our management team. Members of our advisory board
have entered into consulting agreements which provide for expense
reimbursements, 10,000 non-qualified stock options and cash compensation of
$1,500 for attendance at each formal board meeting. The following is a short
discussion of our advisory board members' background:
Ralph Arlinghaus, Ph.D. is Professor and Chairman of the Department of
Molecular Pathology at M. D. Anderson Cancer Center since 1986. Dr. Arlinghaus
has an extensive research background and experience in several fields, including
small RNA viruses (picornaviruses), retroviruses, including HIV, molecular
mechanisms involved in signal transduction, and molecular aspects of leukemia
research both at the level of diagnostics and developing novel strategies to
treat leukemia. From 1983-1986 Dr. Arlinghaus was Director of Vaccine
Development at the Johnson & Johnson Biotechnology Center in La Jolla, CA.
33
Susan G. Bonitz, Ph.D., has served as a pharmaceutical business development
consultant to numerous early-stage biotechnology companies. Dr. Bonitz has an
extensive research background in molecular biology, including DNA cloning, RNA
characterization, and PCR analysis. She has conducted research at Genentech,
Exxon Research and Engineering, Schering-Plough, and Cold Spring Harbor
Laboratory. Because of her evaluations of a wide range of biotechnology
companies, she has interacted with both the scientific and business
pharmaceutical community. Dr. Bonitz has done extensive editing for two widely
used technique publications-Current Protocols in Molecular Biology and Current
Protocols in Immunology. She received her Ph.D. from Columbia University in
mitochondrial research and has published articles in the field in peer-reviewed
journals.
Floyd H. Chilton, Ph.D., is Founder, Director, President, Chief Executive
Officer and Chief Scientific Officer of Pilot Therapeutics. Prior to joining
Pilot Therapeutics as CEO and CSO in December 2000, Dr. Chilton was Director of
Molecular Medicine, Professor of Physiology and Pharmacology, Professor of
Internal Medicine (Section on Pulmonary and Critical Care Medicine) and
Professor of Biochemistry at the Wake Forest University School of Medicine. Dr.
Chilton is widely recognized in academia and industry for his leading work on
the role of arachidonic acid metabolism in human diseases.
Gerald Lee Mandell, M.D., MACP is the Owen R. Cheatham Professor of the
Sciences and Professor of Medicine at the University of Virginia. He is the
founding editor of the world's leading reference source, Principles and
Practices of Infectious Diseases and the journal Current Infectious Diseases. He
is a past-President of the Infectious Diseases Society of America and was holder
of an NIH MERIT Award for his research focused on neutrophils and infection and
neutrophil interactions with antibiotics. He is a member of the Institute of
Medicine.
James M. Oleske, M.D., MPH is Francois-Xavier Bagnoud Professor of
Pediatrics and Director, Division of Pulmonary, Allergy, Immunology and
Infectious Diseases Department of Pediatrics UMD-New Jersey Medical School. Dr.
Oleske is an internationally recognized expert in the management of children
with HIV/AIDS. His earlier interest in immune based therapy for infants and
children with primary immunodeficiency has been extended to children with HIV
infection. His multiple medical Board certifications (Allergy/Immunology,
Infectious Disease, Laboratory Immunology and Palliative/Hospice Care and Pain)
reflect his lifelong commitment of advocacy for children.
David S. Perlin, Ph.D., is the Scientific Director of The Public Health
Research Institute, an internationally recognized 60 year-old biomedical
research institute in New York City that emphasizes molecular approaches to
infectious diseases research. Dr. Perlin is widely published, and his research
activities focus on investigating the molecular properties of fungal membrane
proteins, novel approaches to fungal diagnostics, and the molecular basis for
clinical resistance to antifungal agents.
Leo A. Whiteside, M.D., is founder and President of Missouri Bone and Joint
Center, Missouri Bone and Joint Research Laboratory, and Whiteside Biomechanics
Inc. Dr. Whiteside is an internationally recognized arthritis surgeon and
innovator, specializing in total replacement of the hip and knee. He has been
the surgeon-inventor for three major hip replacement and two major knee
replacement systems, and his company is involved with developing and marketing
orthopedic surgical instruments and implantable devices. He is past president of
the Hip Society, recipient of the Charnley award for excellence for research
involving hip replacement surgery, and is currently on the editorial board of
The Journal of Arthroplasty and Clinical Orthopedics and Related Research.
34
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that
our directors and executive officers and persons who beneficially own more than
10% of our common stock (referred to herein as the "reporting persons") file
with the Securities and Exchange Commission various reports as to their
ownership of and activities relating to our common stock. Such reporting persons
are required by Securities and Exchange Commission regulations to furnish us
with copies of all Section 16(a) reports they file. Based solely upon a review
of copies of Section 16(a) reports and representations received by us from
reporting persons, and without conducting any independent investigation of our
own, in 2002, all Forms 3, 4 and 5 were timely filed with the Securities and
Exchange Commission by such reporting persons, except for John J. Shea, a
director, who was granted 25,000 options to purchase our common stock in March
2002 upon his appointment to our board of directors.
Code of Ethics
On March 24, 2003 our board of directors adopted a code of ethics, a copy of
which is filed as an exhibit to this Report, that applies to our principal
executive and financial officers. We intend to file amendments, changes or
waivers to the code of ethics as required by SEC rules.
Item 10. Executive Compensation.
Directors do not receive compensation for their duties as directors.
SUMMARY COMPENSATION TABLE*
Long Term Compensation
-------------------------------------------------
Annual Compensation(1) Awards Payouts
---------------------------------- ------------------------ -----------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Principal Position Year Salary Bonus Compensation Award(s) Options/SARs Payouts Compensation(2)
------------------------------------ ---- ---------- --------- ------------ ---------- ------------- ------- --------------
($) ($) ($) ($) (#) ($) ($)
Francis E. O'Donnell, Jr., M.D. ...... 2002 $ 112,500 -- -- -- 61,991 -- --
CEO, President and Chairman 2001 -- -- -- -- 8,009 -- --
709 The Hampton Lane 2000 -- -- -- -- -- -- --
Chesterfield, MO 63017
James A. McNulty, CFO, Secretary and . 2002 $ 170,922 $35,000 -- -- -- -- --
Treasurer 2001 40,000 -- -- -- -- -- --
4419 W. Sevilla Street 2000 -- -- -- -- -- -- --
Tampa, Florida 33629
Donald L. Ferguson,...... ............ 2002 -- -- -- -- -- -- --
Senior Executive Vice President 2001 -- -- -- -- 274,600 -- --
Land Dynamics, Inc. 2000 -- -- -- -- -- -- --
11719 Old Ballas Road, Suite 110
St. Louis, MO 63141
Raphael J. Mannino, Ph.D.,(3)......... 2002 $ 91,500 -- -- -- 35,423 -- $ --
Executive Vice President, 2001 83,650 -- -- -- 96,110 -- 726,957
Chief Scientific Officer 2000 64,800 -- -- -- -- -- --
UMDNJ New Jersey Medical School
185 South Orange Avenue, Building 4
Newark, NJ 07103
Christopher Chapman,..... ............ 2002 $ 80,000 -- -- -- -- -- --
Executive Vice President of Medical 2001 80,000 -- -- -- 91,533 -- --
and Regulatory Affairs and Director 2000 -- -- -- -- -- -- --
of New Business Development
(pharmaceuticals)
800 Falls Lake Drive
Mitchelsville, MD 20720
Susan Gould-Fogerite, Ph.D.,(4)....... 2002 $ 46,660 -- -- -- -- -- $ --
Vice President and Director of 2001 $ 40,800 -- -- -- 34,324 -- 581,564
Innovation and Discovery 2000 $ 40,800 -- -- -- -- -- --
UMDNJ New Jersey Medical School
185 South Orange Avenue, Building 4
Newark, NJ 07103
35
-------------------------
* Salary reflects total compensation paid to these executives (pre-merger
and post-merger with BioDelivery Sciences, Inc. during these periods).
(1) The annual amount of perquisites and other personal benefits, if any, did
not exceed the lesser of $50,000 or 10% of the total annual salary reported
for each named executive officer and has therefore been omitted.
(2) Reflects the increase in value of the permanent discount stock (a variable
award) and the compensation expense recorded by us as a result of the
agreement to remove the permanent discount and put rights.
(3) Excludes $30,930, which funds were reimbursed by us to the University of
Medicine and Dentistry of New Jersey during 2002 (pursuant to a contractual
arrangement) for services rendered by Dr. Mannino to such university.
(4) Excludes $31,797, which funds were reimbursed by us during 2002 to the
University of Medicine and Dentistry of New Jersey during 2002 (pursuant to
a contractual arrangement) for services rendered by Dr. Gould-Fogerite to
such university.
Option Grants During Year Ended December 31, 2002
Potential Realizable Value at Assumed Annual Rates
Individual Grants of Stock Price Appreciation for Option Term
----------------- -------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
Percent of
Number of Total
Securities Options/SARs Exercise
Underlying Granted to or Base
Options/SARsEmployees in Price
Name Granted(#) Fiscal Year ($/Sh) Expiration Date 5%($) 10%($)
---- ---------- ----------- ------ --------------- ----- ------
Francis E. O'Donnell, Jr. M.D...... 26,991 27.71% $ 5.50 March 5, 2007 $ 41,014 $ 90,631
35,000 35.93% $ 1.70 September 25, 2007 $ 16,439 36,325
Raphael J. Mannino, Ph.D........... 15,423 15.83% $ 5.50 March 5, 2007 $ 23,436 $ 51,787
20,000 20.53% $ 1.70 September 25, 2007 $ 9,394 $ 20,757
James A. McNulty................... ---- ---- ---- ---- ---- ----
Donald L. Ferguson................. ---- ---- ---- ---- ---- ----
Christopher Chapman, M.D........... ---- ---- ---- ---- ---- ----
Susan Gould-Fogerite, Ph.D......... ---- ---- ---- ---- ---- ----
Aggregated Option Exercises in Last Fiscal year and Fiscal Year-End Option Values
No options were exercised during the fiscal year-end December 31, 2002.
36
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Number of Value of
Securities Unexercised
Underlying Unexercisable
Unexercised In-The-Money
Options/SARs At Options/SARs At
Shares Fiscal Year-End(#)Fiscal Year-End($)
Acquired On Value Exercisable Exercisable
Name and Principal Position Exercise(#) Realized($) Unexercisable Unexercisable
--------------------------- ----------- ----------- ------------- -------------
(a) (b) (c) (d) (e)
Francis E. O'Donnell, Jr., M.D.......... -- -- -- --
CEO, President and Chairman
709 The Hampton Lane
Chesterfield, MO 63017
James A. McNulty, CFO................... -- -- -- --
Secretary and Treasurer
4419 W. Sevilla Street
Tampa, Florida 33629
Donald L. Ferguson...................... -- -- -- --
Senior Executive Vice President
Land Dynamics, Inc.
11719 Old Ballas Road, Suite 110
St. Louis, MO 63141
Raphael J. Mannino, Ph.D................ -- -- -- --
Executive Vice President,
Chief Scientific Officer
UMDNJ New Jersey Medical School
185 South Orange Avenue, Building 4
Newark, NJ 07103
Christopher Chapman..................... -- -- -- --
Executive Vice President of Medical
and Regulatory Affairs and
Director of New Business
Development (pharmaceuticals)
800 Falls Lake Drive
Mitchelsville, MD 20720
Susan Gould-Fogerite, Ph.D.............. -- -- -- --
Vice President and Director of
Innovation and Discovery
UMDNJ New Jersey Medical School
185 South Orange Avenue, Building 4
Newark, NJ 07103
Employment Agreements
Except for Dr. Frank O'Donnell, Mr. James McNulty, Dr. Christopher Chapman, Dr.
Susan Gould-Fogerite and Dr. Rafael Mannino, we currently have no written
employment agreements with any of our officers, directors, or key employees. We
may elect to pursue obtaining employment agreements with certain of these
individuals at some point in the future. All directors and officers have
executed confidentiality and non-compete agreements with us.
37
Under our employment at will arrangement, our officers received the following
annualized salaries and other benefits in 2001:
(i) Dr. O'Donnell, President, CEO and Chairman -- On March 29, 2002, Dr.
O'Donnell executed an employment agreement to be our full-time President and CEO
at an annual salary of $150,000. Dr. O'Donnell's term of employment shall be no
longer than three years or until another CEO candidate is appointed.
(ii) James A. McNulty, CFO, Secretary and Treasurer -- Although he is a
part-time CFO, he has an employment agreement with us (which was amended on
August 31, 2002) for a base salary of $185,000, which terminates on August 31,
2005. Under the terms of this agreement, he is also entitled to the following
benefits: medical, dental and disability and 401(k).
(iii) Donald Ferguson, Senior Executive Vice President -- Receives no
salary and no benefits.
(iv) Dr. Raphael Mannino, Ph.D., Executive Vice President, and Chief
Scientific Officer -- On September 1, 2002, Dr. Mannino executed an employment
agreement with us at an annual salary of $210,000. Such agreement terminates on
September 1, 2005. Under the terms of this agreement, he is also entitled to the
following benefits: medical, dental and disability and 401(k).
(v) Dr. Susan Gould-Fogerite, Vice President and Director of Innovation and
Discovery -- On August 31, 2002, Dr. Gould-Fogerite executed an employment
agreement with us at an annual salary of $146,030. Such agreement terminates on
August 31, 2005. Under the terms of this agreement, she is also entitled to the
following benefits: medical, dental and disability and 401(k).
(vi) Christopher Chapman, M.D., Executive Vice President of Medical and
Regulatory Affairs and Director of New Business Development (pharmaceuticals) --
Receives $6,667 per month pursuant to a consulting contract and receives no
other benefits from us. This consulting contract was entered into prior to Dr.
Chapman becoming an officer, however, he continues to receive remuneration under
the consulting agreement. Prior to the effective date, such consulting agreement
will be reconstituted into an employment agreement on similar terms and
conditions.
Drs. Raphael Maninno and Susan Gould-Fogerite had outstanding debt payable to us
which was incurred with their purchase of stock of BioDelivery Sciences, Inc. in
1999. Simultaneously with the closing of our public offering in June, 2002, we
forgave those notes and provided these same individuals with a total of
approximately $200,000 as compensation for their tax liability.
2001 Stock Option Plan
The purpose of the 2001 stock option plan is (i) to align our interests and
recipients of options under the 2001 stock option plan by increasing the
proprietary interest of such recipients in our growth and success, and (ii) to
advance our interests by providing additional incentives to officers, key
employees and well-qualified non-employee directors and consultants who provide
services to us, who are responsible for our management and growth, or otherwise
contribute to the conduct and direction of its business, operations and affairs.
Our board of directors will administer the 2001 stock option plan, select the
persons to whom options are granted and fix the terms of such options.
38
Under our 2001 stock option plan, we reserved 572,082 shares. The plan was
approved by our stockholders at our October 2001 annual meeting. Our board of
directors subsequently voted to increase the plan to 1,100,000 shares which will
be submitted to our stockholders for approval at the next annual meeting.
Options to purchase 909,383 shares of common stock are outstanding as of
December 31, 2002 under the 2001 stock option plan, a portion of which is
subject to shareholder approval. An additional 380,000 options have been issued
by our board of directors subject to stockholder approval. All options are
intended to be issued under our 2001 Stock Option Plan, as the same may be
amended. Options may be awarded during the ten-year term of the 2001 stock
option plan to our employees (including employees who are directors),
consultants who are not employees and our other affiliates. Our 2001 stock
option plan provides for the grant of options intended to have been approved by
our board of directors and qualify as incentive stock options, or Incentive
Stock Options, under Section 422A of the Internal Revenue Code of 1986, as
amended, and options which are not Incentive Stock Options, or Non-Statutory
Stock Options.
Only our employees or employees of our subsidiaries may be granted Incentive
Stock Options. Our affiliates or consultants or others as may be permitted by
our board of directors, may be granted Non-Statutory Stock Options.
Directors are eligible to participate in the 2001 stock option plan. The 2001
stock option plan provides for an initial grant of an option to purchase up to
20,000 shares of common stock to each director upon first joining our board of
directors and subsequent grants of options to purchase 20,000 shares upon each
anniversary of such director's appointment. Additionally, directors will be
granted 10,000 options for each committee chairmanship and 5,000 options for
each committee membership. Such options are granted at an exercise price equal
to the fair market value of the common stock on the grant date and fully vest
following one year of service after the date of grant.
Options and warrants to purchase 909,383 shares of our common stock at prices
ranging from $2.87 to $17.48 are outstanding at December 31, 2002, a portion of
which are subject to stockholder approval. An additional 380,000 options have
been issued by our board of directors, subject to stockholder approval, at
prices ranging from $1.70 to $5.50. None of our options have been granted at
less than 85% of the fair market value at the time of grant. Certain options
granted under the 2001 options plan do not vest or are not exercisable until the
earlier of: (i) 13 months following the completion this offering registered with
the SEC; or (ii) 24 months from the date of grant. None of our outstanding
options have terms in excess of five (5) years from the date of grant.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The following table sets forth, as of March 20, 2003, certain information as to
the stock ownership of each person known by us to own beneficially 5% or more of
our outstanding common stock, by each of our named officers and directors who
owns any shares and by all officers and directors as a group. In computing the
outstanding shares of common stock, we have excluded all shares of common stock
subject to options or warrants since they are not currently exercisable or
exercisable within 60 days and are therefore not deemed to be outstanding and
beneficially owned by the person holding the options or warrants for the purpose
of computing the number of shares beneficially owned and the percentage
ownership of that person. Unless otherwise indicated , the address for each
person listed below is in care of the Company at UMDNJ Medical School 185 South
Orange Avenue, Bldg. #4, Newark, New Jersey 07103.
39
Number of Shares Percentage of Class as of
Name of Beneficial Owner of Common Stock Owned(1) March 20, 2003
------------------------ ----------------------- -------------------------
Hopkins Capital Group II, LLC (2) 3,111,579 43.97%
Francis E. O'Donnell, Jr., M.D. (3) 3,161,922 44.62%
Pharmaceutical Product Development, Inc. (4) 690,000 9.74%
Jonnie R. Williams, Sr. (5) 3,203,112 45.20%
Dennis Ryll, M.D. (6) 3,157,346 44.56%
Raphael J. Mannino, Ph.D. (7) 182,609 2.58%
James A. McNulty (8) 76,659 1.08%
Donald L. Ferguson (9) 91,533 1.30%
Christopher Chapman, M.D. (10) --- ---
Susan Gould-Fogerite, Ph.D. (11) 152,174 2.15%
L.M. Stephenson, Ph.D (12) --- *
William B. Stone (13) --- *
James R. Butler (14) --- *
John J. Shea (15) --- *
Robert G.L. Shorr (16) --- *
Alan Pearce (17) --- *
All Directors and Officers as a group
(12 persons) 3,664,897 51.72%
---------------------------------
* Less than 1%
(1) Based on 7,085,863 shares of common stock outstanding.
(2) Hopkins Capital Group II, LLC is owned one third by each of (i) various
trusts of the Dr. O'Donnell family; (ii) John R. Williams, Sr. and his
family trusts; and (iii) MOAB L.L.C. which is beneficially owned by Dennis
Ryll and members of his family.
(3) Per Form 4 filed with the SEC on October 7, 2002. Dr. O'Donnell is our
President, Chief Executive Officer, Chairman and a Director. Includes the
shares owned by Hopkins Capital Group II, LLC (see Note 2) and 45,767
shares of common stock, owned by his wife, as to which he disclaims
beneficial interest of. Does not include options to purchase 8,009 shares
40
of common stock at an exercise price of $3.06 per share, options to
purchase 26,991 shares of common stock at an exercise price of $5.50 per
share, in each case exercisable in July, 2003 and options to purchase
35,000 shares of common stock at $1.70 per share which are exercisable on
September 26, 2004. The remaining 4,576 shares of common stock are owned by
Dr. O'Donnell's sister. Dr. O'Donnell's address is 709 The Hampton Lane,
Chesterfield MO 63017.
(4) PPDI's address is 3151 South Seventeenth Street, Wilmington, NC 28412.
(5) Includes the shares owned by Hopkins Capital Group II, LLC (see Note 2) and
45,767 shares of common stock owned by his wife, as to which he disclaims
beneficial interest of. The remaining 45,766 shares of common stock are
personally owned by Mr. Williams. Mr. William's address is 1 Starwood Lane,
Manakin-Sabot, VA 23103.
(6) Includes the shares owned by Hopkins Capital Group II, LLC (see Note 1).
The remaining 45,767 shares of common stock are personally owned by Mr.
Ryll. Dr. Ryll's address is 1029 Speckledwood, Manor Court, Chesterfield,
MO 63017.
(7) Per Form 4 filed with the SEC on October 7, 2002. Dr. Mannino is our
Executive Vice President, Chief Scientific Officer and a Director. Does not
include options to purchase 45,767 shares of common stock at an exercise
price of $3.06 per share vesting in July, 2003, options to purchase 22,883
shares of common stock at an exercise price of $11.80 per share vesting in
July, 2003, options to purchase 22,883 shares of common stock at an
exercise price of $17.48 per share vesting in July, 2003, options to
purchase 20,000 shares of common stock at $1.70 per share which are
exercisable on September 26, 2004 or options to purchase 60,000 shares of
common stock at $1.63 per share which were granted in January 2003.
(8) Mr. McNulty is out Secretary, Treasurer and Chief Financial Officer.
Includes 2,288 shares owned by his wife, as to which he disclaims
beneficial interest of. His address is 4419 W. Sevilla Street, Tampa, FL
33629.
(9) Mr. Ferguson is our Senior Executive Vice President. Does not include
options to purchase 137,300 shares of common stock at an exercise price of
$3.06 per share vesting in July, 2003, options to purchase 68,650 shares of
common stock at an exercise price of $11.80 per share vesting in July, 2003
and options to purchase 68,650 shares of common stock at an exercise price
of $17.48 per share vesting in July, 2003. Mr. Ferguson's address is 11719
Old Ballas Road, Suite 110, St. Louis, MO 63141.
(10) Dr. Chapman is our Executive Vice President of Medical and Regulatory
Affairs. Does not include options to purchase 45,767 shares of common stock
at an exercise price of $3.06 per share vesting in July, 2003, options to
purchase 22,883 shares of common stock at an exercise price of $11.80 per
share vesting in July, 2003 or options to purchase 22,883 shares of common
stock at an exercise price of $17.48 per share vesting in July, 2003.
(11) Dr. Gould-Fogerite is our Vice President and Director of Innovation and
Discovery. Does not include options to purchase 17,162 shares of common
stock at an exercise price of $3.06 per share vesting in July, 2003,
options to purchase 8,581 shares of common stock at an exercise price of
$11.80 per share vesting in June 2003, and options to purchase 8,581 shares
of common stock at an exercise price of $17.48 per share vesting in July,
2003.
(12) Per Form 4 filed with the SEC on October 11, 2002. Does not include options
to purchase 6,865 shares of common stock at an exercise price of $3.06 per
share and 23,135 shares of common stock at an exercise price of $5.50 per
41
share exercisable in July, 2003 or options to purchase 20,000 shares of
common stock at $1.70 per share which are exercisable on September 26,
2004. Dr. Stephenson's address is c/o University of Medicine and Dentistry
New Jersey Medical School, 65 Bergen Street, MB 1414, Newark, NJ 07103.
(13) Per Form 4 filed with the SEC on October 11, 2002. Does not includes
options to purchase 8,009 shares of common stock at an exercise price of
$3.06 per share and 26,991 shares of common stock at an exercise price of
$5.50 per share exercisable in July, 2003 or options to purchase 35,000
shares of common stock at $1.70 per share which are exercisable on
September 26, 2004. Mr. Stone's address is 11120 Geyers Down Lane,
Frontenac MO 63131.
(14) Per Form 4 filed with the SEC on October 7, 2002. Does not include options
to purchase 30,000 shares of common stock at an exercise price of $5.50 per
share exercisable in July, 2003 or options to purchase 25,000 shares of
common stock at $1.70 per share which are exercisable on September 26,
2004. Mr. Butler's address is 109 Cutter Court, Ponte Vedra Beach, FL
32082.
(15) Does not include options to purchase 25,000 shares of common stock at an
exercise price of $5.50 per share exercisable in July, 2003. Mr. Shea's
address is 90 Poteskeet Trail, Kitty Hawk, NC 27949.
(16) Per Form 4 filed with the SEC on October 11, 2002. Does not includes
options to purchase 30,000 shares of common stock at an exercise price of
$5.50 per share exercisable in July, 2003 or options to purchase 25,000
shares of common stock at $1.70 per share which are exercisable on
September 26, 2004. Mr. Shore's address is 28 Brookfall Road, Edison, NJ
08817.
(17) Per Form 3 filed with the SEC on October 11, 2002. Does not include options
to purchase 25,000 shares of common stock at $1.70 per share which are
exercisable on September 26, 2004. Mr. Pearce's address is c/o McKesson
Corporation, One Post Street, San Francisco CA 94104.
Item 12. Certain Relationships and Related Transactions.
During 2001, we entered into agreements with RetinaPharma, Inc. and Tatton
Technology LLC. Both are biotechnology companies which are developing
neutraceutical neuroprotective therapies for treating neurodegenerative disease
such as macular degeneration and Parkinson's disease. To the extent that such
drugs utilize BioralTM cochleate technology, we will support drug development
and will share in ten percent (10%) of all net revenue from such sales of
BioralTM encapsulated drugs. The Hopkins Capital Group II, LLC, one of our
significant stockholders and Dr. Francis E. O'Donnell, Jr., our CEO, President
and a director are affiliated as stockholders and a director of RetinaPharma,
Inc. Additionally, Hopkins Capital, LLC, which is affiliated with Hopkins
Capital Group II, LLC and Dr. O'Donnell, is a significant stockholder of Tatton
Technologies, LLC. Dr. O'Donnell is the managing director of Hopkins Capital
Group, LLC and Hopkins Capital Group II, LLC.
Dr. Francis O'Donnell and Donald Ferguson had personally guaranteed a line of
credit up to $1,050,000 with a bank and other liabilities for our benefit at a
rate of prime plus 2% of which $850,000 matured in May 2002 but was deferred
pending the completion of our public offering. The line of credit was paid off
with proceeds from the offering.
We have also entered into an agreement with Biotech Specialty Partners, LLC, an
emerging alliance of early stage biotechnology and specialty pharmaceutical
companies. Biotech Specialty Partners, LLC is in its formative stage and to date
has not distributed any pharmaceutical products. Under this agreement, Biotech
Specialty Partners, LLC will serve as a nonexclusive distributor of our BioralTM
drugs in consideration of a ten (10%) discount to the wholesale price, which our
42
board of directors have determined to be commercially reasonable. The Hopkins
Capital Group II, LLC, which is affiliated with Dr. Francis E. O'Donnell, Jr.,
our CEO and director, are affiliated as stockholders, and a member of the
management, of Biotech Specialty Partners, LLC.
We have also entered into a letter agreement with BioKeys Pharmaceutical, Inc, a
biotechnology company, which is developing several potential products which are
vaccine based. To the extent that BioKeys Pharmaceutical, Inc. utilizes our
BioralTM drug delivery technology, we will earn a flat royalty which we will
negotiate and be approved by our independent audit committee. Regent Court
Technologies LLC, which is affiliated with one of our stockholders, and Dr.
Francis E. O'Donnell, our CEO and a director, and Donald L. Ferguson, our senior
executive vice-president, are affiliated as stockholders, and Dr. O'Donnell is a
member of the board of directors, of BioKeys Pharmaceutical, Inc. We had also
received a $35,000 loan from BioKeys Pharmaceutical, Inc. to begin research on
their products using our technology. The loan was in the form of a demand note
with an interest rate of 1% plus prime. The loan has been repaid.
Mr. James McNulty, our current Secretary, Treasurer and part-time Chief
Financial Officer, is also the Chief Financial Officer of The Hopkins Capital
Group II, LLC, which is affiliated with Dr. Francis E. O'Donnell, our president
and CEO.
On July 19, 2002, we issued Ellenoff Grossman Schole & Cyruli, LLP, our outside
legal counsel, 25,000 options to purchase shares of our common stock at $7.00
per share. Ellenoff Grossman Schole & Cyruli, LLP is also counsel to our
subsidiary, Bioral Nutrient Delivery, LLC.
Samuel S. Duffey, Esq., through Friday Harbour, LLC, a Florida limited liability
company owned with his spouse, owns 74,371 shares of our common stock. An
aggregate of 51,487 additional shares are owned by trusts for the benefit of Mr.
Duffey's adult children. Mr. Duffey is a partner in Duffey & Dolan, P.A. which
provides legal services to us and Friday Harbour, LLC, which provides consulting
services to us and Hopkins Capital Group, LLC.
In 2001, we settled litigation commenced against BioDelivery Sciences, Inc. by
Irving A. Berstein and certain of his family members and affiliates. Mr.
Berstein was a stockholders, and former officer and director of BioDelivery
Sciences, Inc. The settlement required that we pay $150,000 in cash and $125,000
by promissory note, which was satisfied in full out of the proceeds of our
public offering. At the same time, we purchased the shares of BioDelivery
Sciences, Inc. owned by these stockholders for $500,000 which was paid $200,000
in cash and $300,000 by promissory note which was satisfied in full out of the
proceeds of our public offering.
In December 2001, we exchanged 447,391 shares of our stock for 1,470,000 shares
of BioDelivery Sciences, Inc. redeemable common stock. Drs. Raphael J. Mannino
and Susan Gould-Fogerite, officers of the company, and Leila Zarif, a former
officer of the company, principally owned those BioDelivery Sciences Inc.
shares. In connection with this exchange, we removed certain restrictions, put
rights with respect to those shares and expect to forgive loans of approximately
$320,000 that are secured by the BioDelivery Sciences Inc. shares upon the
successful completion of the offering. In connection with forgiveness of the
notes, we will provide them with approximately $200,000 for compensation for
their tax liability. Due to the variable nature of the underlying stock award,
we recognized compensation expense totaling $2,140,000 in 2001. This
compensation expense does not include any amount with respect to the expected
forgiveness of loans.
43
During 2002, we also issued an additional 75,000 options to purchase our common
stock to each of the University of Medicine and Dentistry of New Jersey and
Albany Medical College in connection with the amendment of our license agreement
with such institutions.
As a matter of corporate governance policy, we have not and will not make loans
to officers or loan guarantees available to "promoters" as that term is commonly
understood by the SEC and state securities authorities.
We believe that the terms of the above transactions with affiliates were as
favorable to us or our affiliates as those generally available from unaffiliated
third parities. At the time of the above referenced transactions, we did not
have sufficient disinterested directors to ratify or approve the transactions;
however, the present board of directors includes four independent directors.
These independent directors are William Stone, James Butler, John Shea, Robert
Shorr and Alan Pearce.
All future transactions between us and our officers, directors or five percent
stockholders, and respective affiliates will be on terms no less favorable than
could be obtained from unaffiliated third parties and will be approved by a
majority of our independent directors who do not have an interest in the
transactions and who had access, at our expense, to our legal counsel or
independent legal counsel. We intend to maintain at least two independent
members on our Board of Directors.
Item 13. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed with this Report.
Number Description
------ -------------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement. (11)
3.1 Articles of Incorporation of the Company as an Indiana corporation (6)
3.2 Articles of Amendment of the Article of Incorporation as an Indiana corporation (5)
3.3 Bylaws of the Company as an Indiana corporation (6)
3.4 Articles of Incorporation of the Company after reincorporation merger into Delaware (8)
3.5 Bylaws of the Company after reincorporation merger into Delaware (8)
4.1 Form of Class A Warrant Agreement with Forms of Class A Warrant Certificate (9)
4.2 Form of Representative's Unit Purchase Option (11)
4.3 Form of Specimen of Unit Certificate (12)
4.4 Form of Specimen of Common Stock Certificate (12)
4.5 Form of Specimen of Warrant Certificate (12)
10.1 Research Agreement with the University of Medicine and Dentistry of New Jersey (2)
10.2 Licensing Agreement with the University of Medicine and Dentistry of New Jersey (3)
10.3 Licensing Agreement with Albany Medical College (3)
44
10.4 License Agreement with BioKeys Pharmaceuticals, Inc. (8)
10.5 License Agreement with Tatton Technologies, LLC (8)
10.6 Addendum to License Agreement with Tatton Technologies, LLC (10)
10.7 License Agreement with RetinaPharma, Inc. (*)
10.8 Addendum to License Agreement with RetinaPharma, Inc. (9)
10.9 License Agreement with Biotech Specialty Partners, LLC (8)
10.10 National Institutes of Health Grant Letter (8)
10.11 Merger Agreement with BioDelivery Sciences, Inc., dated July 20, 2001 (2)
10.12 Settlement Agreement and Stock Purchase Agreement with Irving Berstein, et al. (2)
10.13 Employment Agreement with Christopher Chapman (2)
10.14 Employment Agreement with James A. McNulty (2)
10.15 Employment Agreement with Dr. Frank E. O'Donnell (10)
10.16 Confidentiality Agreement for Dr. Frank E. O'Donnell (10)
10.17 Covenant Not to Compete with Dr. Frank E. O'Donnell (10)
10.18 2001 Incentive Stock Option Plan (8)
10.19 Promissory Note for BioKeys Pharmaceuticals, Inc. dated August 22, 2001 (11)
10.20 Research Agreement with PharmaResearch Corporation (9)
10.21 Credit Facility Loan Agreement (10)
10.22 Purchase Agreement between MAS Capital, Inc. and Hopkins Capital Group II, LLC (10)
10.23 Amendment to Purchase Agreement dated March 29, 2002 (10)
10.24 Agreement between Mr. Aaron Tsai and BioDelivery Sciences International, Inc. (10)
10.25 Employment Agreement with Raphael Mannino (13)
10.26 Employment Agreement with Susan Gould-Fogerite (13)
10.27 Employment Agreement with James A. McNulty (13)
10.28 Sub-License Agreement, effective as of December 31, 2002, by and between the and BioDelivery
Sciences International, Inc. and Pharmaceutical Product Development, Inc. (confidential treatment
requested for certain portions of this exhibit pursuant to 17 C.F.R. Sections 200.80(b)(4) and
240.24b-2) (14)
45
10.29 Limited Liability Company Operating Agreement of Bioral Nutrient Delivery, LLC, dated January 8,
2003, by BioDelivery Sciences International, Inc., as Managing Member and the other members
signatory thereto, as Class B Members. (15)
10.30 Promissory Note, dated February 13, 2003, by Bioral Nutrient Delivery, LLC in favor of BioDelivery
Sciences International, Inc. (15)
20.1 Code of Ethical Conduct of the Registrant (*)
21.1 Subsidiaries of the Registrant (*)
99.1 Certification of the Company's Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (*)(**)
99.2 Certification of the Company's Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (*)(**)
---------------------------------
* Filed herewith
** 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.
(2) Previously filed with Form 10QSB, for the quarter ended March 31, 2001.
(3) Previously filed with Form 10KSB, for the fiscal year ended December 31,
2000 filed on August 15, 2001.
(5) Previously filed with Form 8K filed October 26, 2000 under our prior name
of MAS Acquisition XXIII Corp.
(6) Previously filed with Form 10SB filed January 18, 2000 under our prior
name of MAS Acquisition XXIII Corp.
(8) Previously filed with Form SB-2, Amendment No. 2, February 1, 2002.
(9) Previously filed with Form SB-2, Amendment No. 3, March 26, 2002.
(10) Previously filed with Form SB-2, Amendment No. 4, April 29, 2002.
(11) Previously filed with Form SB-2, Amendment No. 5, May 23, 2002.
(12) Previously filed with Form SB-2, Amendment No. 6, June 24, 2002.
(13) Previously filed with Form 10-QSB, November 15, 2002
(14) Previously filed with Form 8-K, January 7, 2003
(15) Previously filed with Form 8-K, February 26, 2003
(b) Reports on Form 8-K. We filed no Current Reports on Form 8-K during the
fourth quarter of 2002.
Item 14. Controls and Procedures.
Our 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.
46
BIODELIVERY SCIENCES INTERNATIONAL, INC.
Report of Independent Certified Public Accountants.........................................F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001...............................F-3
Consolidated Statements of Operations for the years ended December 31, 2002 and 2001.......F-4
Consolidated Statement of Stockholders' Equity (Deficit) for the years ended
December 31, 2002 and 2001.................................................................F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2002 and 2001.......F-6
Notes to Consolidated Financial Statements.................................................F-7
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
BioDelivery Sciences International, Inc.
We have audited the accompanying consolidated balance sheets of BioDelivery
Sciences International, Inc. and subsidiary as of December 31, 2002 and 2001,
and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of BioDelivery
Sciences International, Inc. and subsidiary as of December 31, 2002 and 2001,
and the consolidated results of their operations and cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
/s/ Grant Thornton LLP
Tampa, Florida
February 13, 2003
F-2
BIODELIVERY SCIENCES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
------------
2002 2001
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 5,207,303 $ 75,513
Accounts Receivable.............................................................. 2,000,000 --
Prepaid expenses and other assets................................................ 201,518 111,684
------------- -------------
Total current assets.......................................................... 7,408,821 187,197
EQUIPMENT, net...................................................................... 435,061 233,562
LICENSES............................................................................ 517,445 517,445
OTHER ASSETS, net................................................................... 28,855 395,365
------------- -------------
TOTAL ASSETS..................................................................... $ 8,390,182 $ 1,333,569
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued liabilities......................................... $ 538,010 $ 814,279
Due to related parties........................................................... 51,725 74,331
Line of credit................................................................... -- 282,527
Deferred revenue................................................................. 2,000,000 37,000
Current portion of capital lease payable......................................... 12,775 14,804
Current portion of notes payable................................................. -- 149,524
------------- -------------
Total current liabilities..................................................... 2,602,510 1,372,465
CAPITAL LEASE PAYABLE, less current portion......................................... 4,742 18,369
NOTES PAYABLE, less current portion................................................. -- 151,733
COMMITMENTS AND CONTINGENCIES....................................................... -- --
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value, 20,000,000 shares authorized, no
shares issued in 2002 and 2001................................................ -- --
Common stock, $.001 par value, 80,000,000 shares authorized, 7,085,863 and
5,000,863 shares issued and outstanding in 2002 and 2001, respectively........ 7,086 5,001
Additional paid-in capital....................................................... 13,956,327 4,903,368
Accumulated deficit.............................................................. (8,180,483) (5,117,367)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT).......................................... 5,782,930 (208,998)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)............................................................ $ 8,390,182 $ 1,333,569
============= =============
The accompanying notes are an integral part of these financial statements.
F-3
BIODELIVERY SCIENCES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended
December 31, December 31,
2002 2001
------------- -------------
Sponsored research revenues............................. $ 827,972 $ 478,385
Expenses:
Research and development............................. 1,532,104 1,663,932
General and administrative:
General and administrative........................ 1,667,031 679,883
Stock compensation................................ 688,911 2,192,084
Legal settlement.................................. 75,000 383,625
------------- -------------
Total expenses.................................... 3,963,046 4,919,524
Interest income (expense), net.......................... 16,994 (21,957)
------------- -------------
Loss before income taxes................................ (3,118,080) (4,463,096)
Income tax benefit...................................... 54,964 18,535
------------- -------------
Net loss................................................ $ (3,063,116) $ (4,444,561)
============== =============
Net loss per common share:
Basic and diluted....................................... $ (0.51) $ (1.15)
============ =============
Weighted average common stock shares outstanding--
basic and diluted.................................... 6,057,890 3,851,587
============= =============
The accompanying notes are an integral part of these financial statements.
F-4
BIODELIVERY SCIENCES INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Total
Preferred Shares Common Shares Additional Stockholders'
---------------- --------------- Paid-In Accumulated Equity
Shares Amount Shares Amount Capital Deficit (Deficit)
------ ------ ------ ------ ------- ------- ---------
BALANCE, DECEMBER 31, 2000.............. 462,243 $ 462 3,512,586 $ 3,513 $1,006,136 $ (672,806) $337,305
Shares issued for cash.................. -- -- 368,421 369 804,631 -- 805,000
Shares issued for satisfaction of debt . -- -- 137,300 137 499,447 -- 499,584
Shares issued in replacement of
preferred stock...................... (462,243) (462) 462,243 462 -- -- --
Shares issued in merger with
subsidiary........................... -- -- 520,313 520 2,540,148 -- 2,540,668
Issuance of stock options............... -- -- -- -- 53,006 -- 53,006
Net loss................................ -- -- -- -- -- (4,444,561) (4,444,561)
-------- ------- --------- ------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 2001.............. -- -- 5,000,863 5,001 4,903,368 (5,117,367) (208,998)
Shares issued for cash, net of
offering costs of $2,374,853 ........ -- -- 2,085,000 2,085 8,569,312 -- 8,571,397
Stock compensation...................... -- -- -- -- 483,647 -- 483,647
Net loss................................ -- -- -- -- -- (3,063,116) (3,063,116)
-------- ------- --------- ------- ----------- ------------ -----------
BALANCE, December 31, 2002.............. -- $ -- 7,085,863 $ 7,086 $13,956,327 $(8,180,483) $5,782,930
======== ======= ========= ======= =========== ============ ==========
The accompanying notes are an integral part of this financial statement.
F-5
BIODELIVERY SCIENCES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended
December 31, December 31,
2002 2001
---- ----
OPERATING ACTIVITIES:
Net loss....................................................... $ (3,063,116) $ (4,444,561)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization............................... 126,737 104,789
Deferred revenue............................................ 1,963,000 37,000
Litigation settlement....................................... -- 425,000
Stock compensation expense.................................. 688,911 2,190,395
Changes in assets and liabilities:
Accounts receivable....................................... (2,000,000) --
Prepaid expenses and other assets......................... 273,876 (417,103)
Accounts payable and accrued liabilities.................. (481,533) 420,259
Due to/from related parties............................... (22,606) 52,754
-------------- -------------
Net cash used by operating activities..................... (2,514,731) (1,631,467)
-------------- -------------
INVESTING ACTIVITIES:
Purchase of equipment.......................................... (325,436) (84,862)
Purchase of minority interest.................................. -- (116,375)
------------- -------------
Net cash used by investing activities..................... (325,436) (201,237)
-------------- -------------
FINANCING ACTIVITIES:
Issuance of Common Stock....................................... 8,571,397 805,000
Net change in line of credit................................... (282,527) 282,527
Payment on capital lease payable............................... (15,656) (6,506)
Payment on notes payable....................................... (301,257) (123,743)
-------------- -------------
Net cash provided by financing activities................. 7,971,957 957,278
------------- -------------
NET CHANGE IN CASH................................................ 5,131,790 (875,426)
CASH AT BEGINNING OF PERIOD....................................... 75,513 950,939
------------- -------------
CASH AT END OF PERIOD............................................. $ 5,207,303 $ 75,513
============= =============
The Company paid interest of $40,790 and $28,178 during 2002 and 2001,
respectively.
In 2001, in addition to paying cash of $350,000, the Company issued notes
payable totaling $425,000 in connection with a litigation settlement and
re-acquisition of the BioDelivery Sciences, Inc. common shares previously held
by certain minority stockholders. This transaction resulted in the recognition
of licenses of $116,375. In 2001, the Company issued 137,300 shares of its
common stock in full payment of a related-party payable of approximately
$500,000.
In 2001, the Company exchanged 72,922 shares of its common stock for common
shares of BioDelivery Sciences, Inc. previously held by minority stockholders.
This exchange resulted in the recognition of licenses of $401,070. In addition,
the Company exchanged 447,391 shares of its common stock for outstanding
redeemable permanent discount common shares of BioDelivery Sciences, Inc. The
variable nature of this underlying stock award, as modified by the removal of
discount and redemption provisions, resulted in the recognition of compensation
expense of approximately $2,140,000.
During 2002 and 2001, the Company granted stock options to non-employees
resulting in the recognition of compensation expense of approximately $162,000
and $53,000 in 2002 and 2001, respectively. During 2002, the Company forgave
employee stock subscription notes receivable, which resulted in compensation
expense of approximately $321,000. These notes were secured by common stock and
were previously included as a reduction of stockholders' equity.
The accompanying notes are an integral part of these financial statements.
F-6
BIODELIVERY SCIENCES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Organization
BioDelivery Sciences International, Inc. ("BDSI" or the "Company")
(formerly known as MAS Acquisition XXIII Corp.) was incorporated in the State of
Indiana on January 6, 1997. BDSI and its former subsidiary (prior to the merger
discussed below), BioDelivery Sciences, Inc. ("BDS"), are collectively referred
to as the Company. In October 2000, BDSI acquired 84.8% of the voting rights of
BioDelivery Sciences Inc. through the purchase of BioDelivery Sciences Inc.
Series A Preferred Stock.
As of December 2001, BDSI and BDS had entered into a merger agreement. The
merger was subsequently consummated on January 7, 2002 (the "Merger"). The
Company considers December 31, 2001 to be the acquisition date for accounting
purposes as the rights of ownership of BDS had been essentially transferred to
BDSI, without restrictions, by that date. The agreement required an exchange of
1.33 shares of identical BDSI common stock for each share of BDS common stock
outstanding, including redeemable common stock. The Company also exchanged
72,922 shares of common stock for 239,600 shares of BDS common stock and 447,391
shares of common stock for 1,470,000 shares of BDS redeemable common stock. The
acquisition of the 239,600 shares of common stock represents the acquisition of
minority interest, which resulted in recorded licenses of approximately
$400,000. Prior to the acquisition of the 1,470,000 shares of redeemable common
stock the Company agreed to remove the permanent discount and redemption
provisions and agreed to the forgiveness of the stockholder debt associated with
these shares upon, or soon after, the 2002 public offering of securities. The
redeemable stock was originally characterized as a variable stock award for
accounting purposes and therefore, the acquisition of the redeemable stock and
the removal of the restrictions in December 2001 involved the recognition of
compensation costs totaling approximately $2,137,000. As of December 2001, the
redemption provisions with respect to such shares have been terminated.
The Company has devoted substantially all of its efforts to research and
product development involving drug delivery technology (e.g., cochleate
technology) and in December 2002 secured a licensing agreement, reflected in the
balance sheet as a receivable and deferred revenue. As a result of the licensing
agreement, the Company determined that it no longer meets the criteria for a
development stage company. The Company intends to obtain additional funds for
research and development through collaborative arrangements with corporate
partners, license agreements, additional financings, and from other sources. The
Company operates in one segment focused on the development of its drug delivery
platform technology.
In March 2002, the Company approved a one for 4.37 reverse stock split. The
financial statements have been retroactively restated to reflect this reverse
stock split.
Note 2--Summary of Significant Accounting Policies
Principles of Consolidation
The financial statements include the accounts of BDSI and its subsidiary
(until the Merger), BioDelivery Sciences Inc. All significant inter-company
balances have been eliminated. At January 1, 2001 other stockholders owned 100%
of the common stock of BioDelivery Sciences Inc. while BDSI owned preferred
stock with voting rights, representing 84.8% of the total voting rights. At
January 1, 2001, the equity attributable to the minority interest holders was at
a deficit balance and accordingly was reduced to zero. In connection with a
litigation settlement and in connection with the Merger of BDSI and BDS the
remaining minority interest was acquired by the Company.
F-7
BIODELIVERY SCIENCES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Research and development expenses are charged to operations
as incurred. Research and development expenses principally include, among other
things, consulting fees and cost reimbursements to the University of Medicine
and Dentistry of New Jersey ("UMDNJ"), testing of compounds under investigation,
and salaries and benefits of employees engaged in research and development
activities. Patent costs are expensed as incurred as research and development
expenses. During the fourth quarter of 2002, the Company evaluated the
classification of certain overhead costs previously reported as research and
development costs and determined that such costs are more representative of
general and administrative expenses. Accordingly, the Company reclassified
approximately $318,000 of such costs recognized through September 30, 2002 to
general and administrative costs in the fourth quarter.
Revenues may also include nonrefundable technology license fees and
milestone payments. The 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.
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.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
Equipment
Office and laboratory equipment are carried at cost less accumulated
depreciation, which is computed on a straight-line basis over their estimated
useful lives, generally 5 years. Accelerated depreciation methods are utilized
for income tax purposes.
Licenses
Licenses are composed of license agreements with UMDNJ and Albany Medical
College ("AMC"). The value recognized for these licenses principally arose on
December 31, 2001 in connection with the purchase of minority interest shares
resulting from a merger agreement between BDSI and BDS and was allocated to
licenses during December 2002. The licenses are amortized over their estimated
useful life of 15 years.
F-8
BIODELIVERY SCIENCES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
Deferred income tax assets and liabilities are determined based on
differences between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income. Income
tax expense is the tax payable or refundable for the period plus or minus the
change during the period in deferred tax assets and liabilities.
Use of Estimates in Financial Statements
The preparation of the accompanying financial statements conforms with
accounting principles generally accepted in the United States of America and
requires management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures 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 and assumptions.
Impairment of Assets
The Company periodically reviews long-lived assets and licenses for
impairment, whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company uses an estimate
of the undiscounted cash flows over the remaining life of its long-lived assets,
or related group of assets where applicable, in measuring whether the assets to
be held and used will be realizable. In the event of an impairment, the Company
would discount the future cash flows using its then estimated incremental
borrowing rate to estimate the amount of the impairment.
Concentration of Credit Risk
The Company derived substantially all of its working capital from the sale
of its Common Stock and from research and development arrangements. During
December 2002, the Company entered into a licensing agreement with a company,
which is also a shareholder. As a result, all of the accounts receivable at
December 31, 2002 are due from this entity. Management has considered the third
party's financial condition and expects the amount to be collected in full.
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 below (see Note 11):
F-9
BIODELIVERY SCIENCES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended Year Ended
December 31, December 31,
2002 2001
---- ----
Net loss, as reported.................................... $ (3,063,116) $ (4,444,561)
Less: stock-based employee compensation cost under the
fair value based method, net of related tax effects.... (689,410) (143,559)
------------- -------------
Pro forma net loss....................................... $ (3,752,526) $ (4,588,120)
============ ============
Net loss per common share-basic and diluted:
as reported........................................... $ (.51) $ (1.15)
============ ============
pro forma............................................. $ (.62) $ (1.19)
============ ============
Stock Compensation
Under the terms of a 1999 redeemable common stock purchase agreement, the
Company was required to re-purchase 1,470,000 shares of BDS redeemable permanent
discount common stock at the option of the holder. The Company accounted for its
ten-year re-purchase obligation (through 2009) using variable plan accounting;
however, through the date of the Merger (see Note 1) the value of the stock
(less the permanent discount) was lower than the initial redemption value. Under
the terms of the redemption agreement, holders could require the Company to
repurchase, at the then fair value (less the permanent discount), the permanent
discount common stock beginning in 2004 or upon an employee's termination,
whichever was earlier. In December 2001, the Company agreed to remove the
permanent discount and put rights, resulting in the recognition of approximately
$2,140,000 of compensation expense. During 2002, the Company also recognized
$526,318 of compensation expense associated with the forgiveness of employee
stock subscription notes receivable and related income tax payable on behalf of
the employees. No future costs are expected with regard to this stock based
compensation award.
Fair Value of Financial Instruments
At December 31, 2002, the carrying amount of cash, accounts receivable,
accounts payable, accrued expenses, and capital lease obligations approximate
fair value based either on the short term nature of the instruments or on the
related interest rate approximating the current market rate.
New Accounting Pronouncements
In July, 2001, the Financial Accounting Standards Board (FASB) issued 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 this Statement apply to goodwill and other intangible assets
acquired between July 1, 2001, and the effective date of SFAS 142. The adoption
of these standards did not have a material impact on the Company's financial
statements.
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
F-10
BIODELIVERY SCIENCES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for Long-Lived Assets to Be Disposed Of. The provisions of this statement are
effective for the year beginning January 1, 2002. The adoption of this standard
did not have a material impact on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which (i) amends SFAS 123, Accounting
for Stock-Based Compensation, to provide alternative methods of transition for
an entity that voluntarily changes to the fair value based method of accounting
for stock-based employee compensation (ii) amends the disclosure provisions of
SFAS 123 to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation and (iii) requires disclosure about those effects in
interim financial information. Items (ii) and (iii) of the new requirements in
SFAS 148 are effective for financial statements for fiscal years ending after
December 15, 2002. The Company has adopted the reporting requirements of item
(ii) and will include the reporting requirements of item (iii) beginning in its
first interim period after December 15, 2002.
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirement for Guarantors, including Indirect
Guarantors of Indebtedness to Others (FIN 45). FIN 45 creates new disclosure and
liability recognition requirements for certain guarantees, including obligations
to stand ready to perform. The initial recognition and measurement requirements
of FIN 45 are effective prospectively for guarantees issued or modified after
December 31, 2002, and the disclosure requirements are effective for financial
statement periods ending after December 15, 2002. In accordance with FIN 45, the
Company has disclosed guarantee information.
Note 3--Business Combination
On October 10, 2000, BDSI acquired 210,006 shares of newly issued BDS
Series A Convertible Preferred Stock representing 84.8% of the voting rights of
BDS in exchange for cash and notes payable to BDS of $1,000,000 and $14,000,000,
respectively. Since its inception in 1995, BDS has been principally engaged in
developing a cochleate based drug delivery platform and had no pre-existing
relationship with BDSI prior to the acquisition. The business combination was
accounted for as a purchase. The shares of Series A Preferred were convertible
into BDS Common Stock on a 50-for-1 basis, subject to customary anti-dilution
adjustments. Dividends accrued on the Series A Preferred at the rate of 8% per
annum. In the event of liquidation, dissolution, or winding up of BDS, the
Series A Preferred Stockholders would have been entitled to receive, in
preference to Common Stockholders of BDS, an amount per share equal to the
original purchase price plus any accrued dividends per share. The Series A
Preferred Stock was convertible at the option of the preferred stockholders, but
would automatically convert at the earlier of the initial public offering of
BDS's common stock, or September 2005. The BDS Series A Preferred Stock and note
are eliminated in consolidation. BDSI and BDS had amended the payment terms of
the $14.0 million notes to defer the commencement of payments to August 1, 2001.
The first scheduled payment under the notes was otherwise required on January 1,
2001.
All the BDS common stock was subsequently acquired with the settlement of
certain litigation (see Note 7) and the merger of BDS with BDSI (see Note 1).
The Series A Convertible Preferred Stock of BDS was retired as part of the
merger.
Note 4--Research and Development Arrangements
Upon its formation, BDS originally secured license rights from two
universities that have exclusive rights to certain technology. In exchange for
these rights, BDS issued shares of common stock with anti-dilution provisions
F-11
BIODELIVERY SCIENCES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and agreed to make future royalty payments to the universities upon (a) the
licensing of rights to sub-licensees (up to 5% of fees as amended on December
16, 2002); (b) sales by sub-licensees (25% of BDS proceeds); or (c) BDS sales
(3% of revenue). The amendment to the agreement on December 16, 2002 also
provided for the granting of options to purchase 75,000 shares of the Company's
common stock to each of the two universities.
BDS had entered into a research agreement with UMDNJ. BDS incurred costs of
$306,477 and $159,025, for 2002 and 2001, respectively, to UMDNJ under the terms
of the research agreement. The research agreement provides for the procurement
of supplies, rent (until April 2001), certain payroll costs, and other expenses
associated with research performed under the research agreement. On April 1,
2001, the Company agreed to issue approximately 137,300 shares of common stock
in consideration for payment in full of its approximate $500,000 payable at
March 31, 2001, to UMDNJ. At December 31, 2002 and 2001, the Company owed
$51,725 and $74,331, respectively, under this agreement.
During 2001, the Company entered into agreements with RetinaPharma
International Inc. and Tatton Technology LLC. Both are biotechnology companies,
which are developing neutraceutical neuroprotective therapies for treating
neurodegenerative disease such as macular degeneration and Parkinson's disease.
To the extent that such drugs utilize Bioral cochleate technology, the Company
will support drug development and will be entitled to a royalty of ten percent
(10%) of net revenues from such sales of Bioral encapsulated drugs. The
CEO/director of the Company is a significant shareholder of these companies. The
Company incurred a deminimus amount of costs relating to these agreements in
2002 and 2001.
The Company has also entered into an agreement with Biotech Specialty
Partners, LLC, an emerging alliance of early stage biotechnology and specialty
pharmaceutical companies. Biotech Specialty Partners, LLC is in its formative
stage and to date has not distributed any pharmaceutical products. Under this
agreement, Biotech Specialty Partners, LLC will serve as a nonexclusive
distributor of the Company's Bioral drugs in consideration of a ten percent
(10%) discount to the wholesale price, which the board of directors has
determined commercially reasonable. The CEO/director of the Company is
affiliated with this company. The Company incurred a deminimus amount of costs
relating to this agreement in 2002 and 2001.
The Company has also entered into an agreement with BioKeys Pharmaceutical,
Inc., a biotechnology company, which is developing several potential products,
which are vaccine based. To the extent that BioKeys Pharmaceutical, Inc.
utilizes the Company's Bioral drug delivery technology, the Company will earn a
royalty ranging between 15% to 30% of product sales incorporating its technology
and between 10% and 20% of any royalty income earned by BioKeys Pharmaceutical,
Inc. with regard to licenses involving its technology. BioKeys provided a
$35,000 advance to the Company under their agreement in 2002, which was repaid
during 2002. The CEO/director and the senior executive vice president of the
Company are affiliated with this company. The Company incurred a deminimus
amount of costs relating to this agreement in 2002 and 2001.
F-12
BIODELIVERY SCIENCES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5--Other Assets
Other assets consist of the following.
Year ended
December 31,
------------
2002 2001
---- ----
Deferred offering costs related to the 2002 public offering..... -- 365,340
Other........................................................... 45,505 43,821
---------- ----------
45,505 409,161
Less: Accumulated amortization.................................. (16,650) (13,796)
----------- ----------
Total other assets, net......................................... $ 28,855 $ 395,365
========== ==========
Note 6--Equipment
Equipment consists of the following:
December 31,
------------
2002 2001
---- ----
Office and laboratory equipment................................. $ 646,774 $ 321,338
Leased equipment................................................ 39,679 39,679
---------- ----------
686,453 361,017
Less accumulated depreciation and amortization.................. (251,392) (127,455)
----------- ----------
Net equipment................................................... $ 435,061 $ 233,562
========== ==========
Depreciation and amortization expense related to equipment for the years
ended December 31, 2002 and 2001 was approximately $124,000 and $104,000,
respectively.
Note 7--Commitments and Contingencies
Litigation
During May 2001, the Company entered into a settlement agreement with a
former consultant and certain stockholders related to the consultant (together,
the "Plaintiffs"). Under the terms of the settlement agreement, the Company
agreed to pay $150,000 in cash and $125,000 in a note payable to the Plaintiffs.
The Company also agreed to re-purchase all of the BioDelivery Sciences Inc.
common stock owned by the Plaintiffs valued at $116,375 for cash of $200,000 and
a note payable of $300,000. Relating to this litigation, the Company accrued
approximately $300,000 at December 31, 2000 and recorded an additional $380,000
of legal expense for the year ended December 31, 2001. As of December 31, 2002,
all obligations under the settlement agreement have been satisfied.
Operating Lease
Beginning in April 2001, the Company leases a facility from UMDNJ under an
operating lease that runs through December 31, 2005. Lease expense for the years
ended December 31, 2002 and 2001 was approximately $45,000 and $30,000,
F-13
BIODELIVERY SCIENCES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
respectively. The future minimum commitments on this operating lease at December
31, 2002 are as follows:
2003................................................. $ 50,580
2004................................................. 56,580
2005................................................. 62,580
------------
$ 169,740
Capital Lease
The Company leases certain equipment under a capital lease. Future
minimum lease payments at December 31, 2002 remaining on this capital lease are
as follows.
2003................................................ $ 14,713
2004................................................ 4,905
Less amount representing interest................... (2,101)
-------------
$ 17,517
Indemnifications
The Company indemnified its officers and directors against costs and
expenses related to shareholder and other claims (i.e., only actions taken in
their capacity as officers and directors) that are not covered by the Company's
directors and officers insurance policy. This indemnification is ongoing and
does not include a limit on the maximum potential future payments, nor are there
any recourse provisions or collateral that may offset the cost. As of December
31, 2002, the Company has not recorded a liability for any obligations arising
as a result of these indemnifications.
Note 8--Common Stock and Warrants
During 2002 the Company completed a public offering of securities
consisting of 2,085,000 units at a sales price of $5.25 per unit. Each unit is
composed of one share of common stock and one Class A warrant to purchase a
share of common stock at a price of $6.30 per share. All of the Class A warrants
and common shares issued under this offering began to trade separately thirty
days following the offering. Net proceeds from the offering amounted to
$8,571,397.
Note 9--Preferred Stock
During 2000, BDS issued 462,243 shares of preferred stock for $1,010,000.
The preferred stock was convertible to common stock on a one-for-one basis, was
non-redeemable, and did not pay dividends. In December 2001, the Company issued
462,243 shares of common stock as replacement for the preferred stock. The
462,243 shares of preferred stock were simultaneously rescinded.
Note 10--Line of Credit
In September 2001, the Company entered into a line of credit facility with
a bank. Originally the available line of credit was $250,000 and was increased
to $350,000 at December 31, 2001. Interest on the line of credit accrues at a
rate of prime plus 2.0%. As of June 30, 2002, the line of credit terminated and
was paid in full.
F-14
BIODELIVERY SCIENCES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11--Stock Options
In October 2001, the board of directors of the Company approved a stock
option plan, which covers a total of 1,100,000 shares of common stock (as
amended). Options may be awarded during the ten-year term of the 2001 stock
option plan to Company employees, directors, consultants and other affiliates.
For the purpose of the pro forma presentation in Note 2, the fair value of
each option grant is estimated on the date of grant using the Black Scholes
options-pricing model with the following weighted-average assumptions used for
grants in 2002 and 2001: No dividend yield, expected volatility of 73%;
risk-free interest rates of 4.50% and 5.56% and expected lives of 5 and 3 years,
respectively.
Activity related to options is as follows and excludes 2,085,000 warrants
issued in connection with the 2002 public offering of securities.
Weighted Average
Exercise Price
Number of Shares per Share
-----------------------------------
Outstanding at December 31, 2000.......... -- $ --
Granted in 2001:
Officers and Directors.............. 610,983 $ 8.59
Others.............................. 222,112 $ 5.01
Forfeitures............................ -- $ --
----------- ---------
Outstanding at December 31, 2001.......... 833,095 $ 7.64
Granted in 2002:
Officers and Directors.............. 372,536 $ 3.26
Others.............................. 221,047 $ 2.67
Forfeitures............................ (137,295) $ 6.89
----------
Outstanding at December 31, 2002 1,289,383
==========
Outstanding Options at December 31, 2002
Weighted Average
Remaining Weighted
Range of Number Contractual Life Average
Exercise Prices Outstanding (Years) Exercise Price
--------------- ----------- ------- --------------
$1.70 220,000 9.7 1.70
$2.37 150,000 10 2.37
$2.88--$3.06 390,054 3.8 3.03
$5.50 186,024 4.2 5.50
$6.60 42,563 3.9 6.60
7.00 25,000 9.5 7.00
$11.80 137,871 3.8 11.80
$17.48 137,871 3.8 17.48
F-15
BIODELIVERY SCIENCES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Exercisable Options at December 31, 2002
Range of Number Weighted Average
Exercise Prices Exercisable Exercise Price
--------------- ----------- --------------
$2.88 27,649 $2.88
$5.50 7,000 $5.50
The options outstanding at December 31, 2002 expire on various dates
throughout 2007.
The weighted average grant date fair value of options granted during 2002
and 2001 whose exercise price is equal to the market price of the stock at the
grant date was $1.19 and $1.58, respectively. The weighted average grant date
fair value of options granted whose exercise price is less than the estimated
market price of the stock at the grant date is $1.63 in 2001. The weighted
average grant date fair value of options granted during 2002 and 2001 whose
exercise price is greater than the estimated market price of the stock at the
grant date is $2.46 and $1.37, respectively.
Compensation expense in connection with the issuance of stock options
totaled approximately $163,000 and $53,000 for 2002 and 2001, respectively.
Note 12--Income Taxes
Other than a $54,964 income tax benefit recognized in 2002 due to the
carryback of net operating losses allowed as a result of the enacted tax law
changes, and a $18,535 income tax benefit recognized in 2001 due to the prior
year understatement of income taxes receivables, the Company has no income tax
expense or benefit for 2002 and 2001 as the Company has incurred net operating
losses since inception and has recognized valuation allowances for all deferred
tax assets.
Reconciliation of the Federal statutory income tax rate of 34% to the
effective rate is as follows:
Year Ended
December 31,
------------
2002 2001
---- ----
Federal statutory income tax rate...................... 34.00% 34.00%
State taxes, net of federal benefit.................... 5.50 4.95
Permanent differences - compensation expense........... (2.30) (21.23)
Net operating loss carryback........................... 1.80 --
Valuation allowance.................................... (37.20) (17.30)
---------- ---------
1.80% 0.42%
========== =========
F-16
BIODELIVERY SCIENCES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences and net operating losses that give
rise to significant portions of deferred tax assets and liabilities consisted of
the following:
December 31,
------------
2002 2001
---- ----
Deferred tax assets (liabilities)
Depreciation............................. $ (61,000) $ (21,000)
Accrued liabilities and other............ 86,000 21,000
Net operating loss carryforward.......... 2,115,000 1,077,000
---------- -----------
2,140,000 1,077,000
Less valuation allowance.................... (2,140,000) (1,077,000)
----------- -----------
Net deferred tax............................ $ -- $ --
========== ===========
At December 31, 2002, the Company has a federal and state net operating loss
carryforward of approximately $5.4 million, which principally expires beginning
in 2020 and 2007 for federal and state purposes, respectively.
Note 13--Net Loss Per Common Share
The following table reconciles the numerators and denominators of the basic
and diluted income per share computations. The weighted average shares
outstanding at December 31, 2001 include the 520,313 shares of common stock
exchanged in the Merger, which was consummated on January 7, 2002. The Company
considers December 31, 2001 to be the acquisition date as the rights of
ownership of BDS had been essentially transferred to BDSI, without restrictions,
by that date.
Year Ended December 31,
-----------------------
2002 2001
---- ----
Net loss--(numerator)...................................... $(3,063,116) $ (4,444,561)
============ ============
Basic:
Weighted average Shares outstanding (denominator)....... 6,057,890 3,851,587
=========== ============
Net loss per common share--basic........................ $ (0.51) $ (1.15)
=========== ============
Diluted:
Weighted average shares outstanding..................... 6,057,890 3,851,587
Effect of dilutive options.............................. -- --
----------- ------------
Adjusted weighted average shares (denominator).......... 6,057,890 3,851,587
=========== ============
Net loss per common share--diluted......................... $ (0.51) $ (1.15)
=========== ============
The effects of all stock options and warrants have been excluded from
Common Stock equivalents because their effect would be anti-dilutive.
Note 14--Related Party Transactions
As more fully discussed in Note 4, the company is a party to research,
development and distribution agreements with related entities. During 2002, the
company repaid $35,000 to BioKeys Pharmaceutical, Inc. according to terms. As
F-17
BIODELIVERY SCIENCES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
more fully discussed in Note 2, BDSI entered into a licensing agreement with a
shareholder.
Note 15--National Institutes of Health Grant
In 2001, the National Institutes of Health (NIH) awarded the Company a
Small Business Innovation Research Grant (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. 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 $881,273 and
$477,000 of costs related to this agreement in 2002 and 2001, respectively.
During the year ended December 31, 2002, the Company received $774,972 and
recognized revenue of $811,972 related to the grant. During the year ended
December 31, 2001, the Company received $479,000 (inclusive of $37,000 of
deferred revenue) and recognized revenue of $442,000 from this grant. As awarded
on September 19, 2001, the grant provided for reimbursement of, or advances for,
future research and development efforts. During October 2001, the Company
negotiated a lump sum payment of $220,000. The terms that were negotiated in
October 2001 allowed the Company to recover $220,000 of costs principally
incurred in the third quarter of 2001, which were recognized as revenue upon
agreement of those negotiated terms in October 2001. 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.
Note 16--Subsequent Events - Unaudited
On January 8, 2003, the Company formed Bioral Nutrient Delivery, LLC, a
Delaware limited liability company (BND). 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 8,600,00 Class B Shares) and certain other individuals and entities
(as the holders of an aggregate of 412,500 Class B Shares).
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
F-18
BIODELIVERY SCIENCES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
commercialize the delivery technology through a combination of licensing
programs to manufacturing, marketing and distribution companies within these
industries.
On February 13, 2003, the Company made an unsecured loan to BND in the
amount of $500,000 to cover organization expenses and initial working capital
requirements. The loan accrues interest at a rate of 4.85% annually, to be paid
back solely from 10% of any royalty revenue that may be received by BND, with
payments first applied to interest, then to principal.
In March 2003, BND filed a registration statement with the SEC to
distribute as a dividend to the Company's shareholders an aggregate of 3,545,431
rights to purchase a corresponding number of Class B Membership Shares, which
rights are exercisable for $0.01.
F-19
SIGNATURES
In accordance with Section 13 or 15(d) 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: March 28, 2003 By: /s/ Francis E. O'Donnell Jr.
-------------------------------------
Name: Francis E. O'Donnell Jr.
Title: Chairman, CEO and President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Person Capacity Date
------ -------- ----
/s/ Francis E. O'Donnell, Jr.
------------------------------- President, Chief Executive Officer,
Francis E. O'Donnell, Jr. Chairman and Director March 28, 2003
/s/ James A. McNulty
------------------------------- Secretary, Treasurer and Chief Financial March 28, 2003
James A. McNulty Officer
/s/ Raphael J. Mannino
------------------------------- Executive Vice President and Chief March 28, 2003
Raphael J. Mannino Scientific Officer and Director
/s/ William B. Stone
------------------------------- Director March 28, 2003
William B. Stone
/s/ James R. Butler
------------------------------- Director March 28, 2003
James R. Butler
/s/ John J. Shea
------------------------------- Director March 28, 2003
John J. Shea
/s/ L.M. Stephenson
------------------------------- Director March 28, 2003
L.M. Stephenson
S-1
/s/ Robert G.L. Shorr
------------------------------- Director March 28, 2003
Robert G.L. Shorr
/s/ Alan Pearce
-------------------------------
Alan Pearce Director March 28, 2003
S-2
CERTIFICATION
I, James A. McNulty, hereby certify that:
1. I have reviewed the Annual Report on Form 10-KSB of BioDelivery Sciences
International, Inc. (the "Registrant");
2. Based on my knowledge, this annual 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 annual 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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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
6. The Registrant's other certifying officers and I have indicated in this
annual 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: March 28, 2003
/s/James A. McNulty
--------------------
James A. McNulty
Chief Financial Officer
CERTIFICATION
I, Francis E. O'Donnell, Jr., hereby certify that:
1. I have reviewed the Annual Report on Form 10-KSB of BioDelivery Sciences
International, Inc. (the "Registrant");
2. Based on my knowledge, this annual 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 Annual 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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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
6. The Registrant's other certifying officers and I have indicated in this
annual 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: March 28, 2003
/s/ Francis E. O'Donnell, Jr.
-----------------------------
Francis E. O'Donnell, Jr.
Chief Executive Officer
EXHIBIT INDEX
The following exhibits are filed with, or incorporated by reference into,
this Annual Report on Form 10-K.
Number Description
------ --------------------------------------------------------------
1.1 Form of Underwriting Agreement. (11)
3.1 Articles of Incorporation of the Company as an Indiana
corporation (6)
3.2 Articles of Amendment of the Article of Incorporation as an
Indiana corporation (5)
3.3 Bylaws of the Company as an Indiana corporation (6)
3.4 Articles of Incorporation of the Company after reincorporation
merger into Delaware (8)
3.5 Bylaws of the Company after reincorporation merger into
Delaware (8)
4.1 Form of Class A Warrant Agreement with Forms of Class A
Warrant Certificate (9)
4.2 Form of Representative's Unit Purchase Option (11)
4.3 Form of Specimen of Unit Certificate (12)
4.4 Form of Specimen of Common Stock Certificate (12)
4.5 Form of Specimen of Warrant Certificate (12)
10.1 Research Agreement with the University of Medicine and
Dentistry of New Jersey (2)
10.2 Licensing Agreement with the University of Medicine and
Dentistry of New Jersey (3)
10.3 Licensing Agreement with Albany Medical College (3)
10.4 License Agreement with BioKeys Pharmaceuticals, Inc. (8)
10.5 License Agreement with Tatton Technologies, LLC (8)
10.6 Addendum to License Agreement with Tatton Technologies,
LLC (10)
10.7 License Agreement with RetinaPharma, Inc. (*)
10.8 Addendum to License Agreement with RetinaPharma, Inc. (9)
10.9 License Agreement with Biotech Specialty Partners, LLC (8)
10.10 National Institutes of Health Grant Letter (8)
10.11 Merger Agreement with BioDelivery Sciences, Inc., dated
July 20, 2001 (2)
10.12 Settlement Agreement and Stock Purchase Agreement with Irving
Berstein, et al. (2)
10.13 Employment Agreement with Christopher Chapman (2)
10.14 Employment Agreement with James A. McNulty (2)
10.15 Employment Agreement with Dr. Frank E. O'Donnell (10)
10.16 Confidentiality Agreement for Dr. Frank E. O'Donnell (10)
10.17 Covenant Not to Compete with Dr. Frank E. O'Donnell (10)
10.18 2001 Incentive Stock Option Plan (8)
10.19 Promissory Note for BioKeys Pharmaceuticals, Inc. dated
August 22, 2001 (11)
10.20 Research Agreement with PharmaResearch Corporation (9)
10.21 Credit Facility Loan Agreement (10)
10.22 Purchase Agreement between MAS Capital, Inc. and Hopkins
Capital Group II, LLC (10)
10.23 Amendment to Purchase Agreement dated March 29, 2002 (10)
10.24 Agreement between Mr. Aaron Tsai and BioDelivery Sciences
International, Inc. (10)
10.25 Employment Agreement with Raphael Mannino (13)
10.26 Employment Agreement with Susan Gould-Fogerite (13)
10.27 Employment Agreement with James A. McNulty (13)
10.28 Sub-License Agreement, effective as of December 31, 2002, by
and between the and BioDelivery Sciences International, Inc.
and Pharmaceutical Product Development, Inc. (confidential
treatment requested for certain portions of this exhibit
pursuant to 17 C.F.R. Sections 200.80(b)(4) and 240.24b-2)(14)
10.29 Limited Liability Company Operating Agreement of Bioral
Nutrient Delivery, LLC, dated January 8, 2003, by BioDelivery
Sciences International, Inc., as Managing Member and the other
members signatory thereto, as Class B Members. (15)
10.30 Promissory Note, dated February 13, 2003, by Bioral Nutrient
Delivery, LLC in favor of BioDelivery Sciences International,
Inc. (15)
20.1 Code of Ethical Conduct of the Registrant (*)
21.1 Subsidiaries of the Registrant (*)
99.1 Certification of the Company's Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (*)(**)
99.2 Certification of the Company's Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (*)(**)
___________________________
* Filed herewith
** A signed original of this written statement required by Section 906 has
been provided to BioDelivery Sciences International, Inc. and will be
retained by BioDelivery Sciences International, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.
(2) Previously filed with Form 10QSB, for the quarter ended March 31, 2001.
(3) Previously filed with Form 10KSB, for the fiscal year ended December 31,
2000 filed on August 15, 2001.
(5) Previously filed with Form 8K filed October 26, 2000 under our prior name
of MAS Acquisition XXIII Corp.
(6) Previously filed with Form 10SB filed January 18, 2000 under our prior name
of MAS Acquisition XXIII Corp.
(8) Previously filed with Form SB-2, Amendment No. 2, February 1, 2002.
(9) Previously filed with Form SB-2, Amendment No. 3, March 26, 2002.
(10) Previously filed with Form SB-2, Amendment No. 4, April 29, 2002.
(11) Previously filed with Form SB-2, Amendment No. 5, May 23, 2002.
(12) Previously filed with Form SB-2, Amendment No. 6, June 24, 2002.
(13) Previously filed with Form 10-QSB, November 15, 2002
(14) Previously filed with Form 8-K, January 7, 2003
(15) Previously filed with Form 8-K, February 26, 2003