SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2006
OR
| o | 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: 0-20580
SYNTHEMED, INC.
(Exact name of registrant as specified in its charter)
Delaware | 14-1745197 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
| | |
200 Middlesex Essex Turnpike, Suite 210 | 08830 |
(Address of principal executive offices) | (Zip Code) |
(732) 404-1117
(Issuer’s telephone number, including area code)
Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 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 o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes o No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common Stock, $.001 Par Value - 82,821,047 shares outstanding at August 4, 2006
Transitional Small Business Disclosure Format (check one):
Yes o No x
SYNTHEMED, INC.
INDEX
| | Page |
Part I - FINANCIAL INFORMATION | |
| | |
| Item 1. Financial Statements | |
| | |
| Condensed Statements of Operations (unaudited) for the three-month | 3 |
| and six-month periods ended June 30, 2005 and 2006 | |
| | |
| Condensed Balance Sheets as of December 31, 2005 and | 4 |
| June 30, 2006 (unaudited) | |
| | |
| Condensed Statements of Cash Flows (unaudited) for the | 5 |
| six-month periods ended June 30, 2005 and 2006 | |
| | |
| Notes to Condensed Financial Statements (unaudited) | 6 |
| | |
| Item 2. Management’s Discussion and Analysis or Plan of Operation | 10 |
| | |
| Item 3. Controls and Procedures | 12 |
| | |
| | |
Part II - OTHER INFORMATION | |
| | |
| Item 5. Other Information | 12 |
| | |
| Item 6. Exhibits | 13 |
| | |
| Signature | 13 |
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYNTHEMED, INC.
| | | (In thousands, except per share data) | |
| | | Three Months Ended | | Six Months Ended | |
| | | June 30, | | June 30, | |
| | | 2005 | | 2006 | | 2005 | | 2006 | |
| | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | |
| Research and development | | $ | 364 | | $ | 563 | | $ | 694 | | $ | 888 | |
| General and administrative | | | 277 | | | 1,223 | | | 466 | | | 1,820 | |
| Sales and marketing | | | | | | 57 | | | | | | 94 | |
| Operating expenses | | | 641 | | | 1,843 | | | 1,160 | | | 2,802 | |
| | | | | | | | | | | | | | |
| (Loss) from operations | | | (641 | ) | | (1,843 | ) | | (1,160 | ) | | (2,802 | ) |
| | | | | | | | | | | | | | |
| Other income/(expense): | | | | | | | | | | | | | |
| Interest income | | | 9 | | | 50 | | | 16 | | | 50 | |
| Other income | | | | | | 1 | | | | | | 1 | |
| Gain on settlement of debt | | | | | | 22 | | | | | | 22 | |
| Interest expense | | | (1 | ) | | (1 | ) | | (3 | ) | | (3 | ) |
| Other income/(expense) | | | 8 | | | 72 | | | 13 | | | 70 | |
| | | | | | | | | | | | | | |
| Net loss | | $ | (633 | ) | $ | (1,771 | ) | $ | (1,147 | ) | $ | (2,732 | ) |
| | | | | | | | | | | | | | |
| Net loss per common share-basic and diluted | | $ | (0.01 | ) | | (0.02 | ) | $ | (0.02 | ) | $ | (0.04 | ) |
| | | | | | | | | | | | | | |
| Weighted average shares outstanding | | | 66,596 | | | 82,289 | | | 63,498 | | | 74,514 | |
See Notes to Condensed Financial Statements
BALANCE SHEETS
| | | (In thousands, except per share data) | |
| | | December 31, | | June 30, | |
| | | 2005 | | 2006 | |
ASSETS | | | | (unaudited) | |
| | | | | | |
Current assets: | | | | | | | |
| Cash and cash equivalents | | $ | 735 | | $ | 4,760 | |
| Prepaid expenses and deposits | | | 94 | | | 147 | |
| Total current assets | | | 829 | | | 4,907 | |
| | | | | | | | |
| Acquired technology, less accumulated amortization | | | 157 | | | 123 | |
| Furniture and equipment, less accumulated depreciation | | | 104 | | | 110 | |
| TOTAL | | $ | 1,090 | | $ | 5,140 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | |
| | | | | | | | |
Current liabilities: | | | | | | | |
| Accounts payable | | $ | 359 | | $ | 152 | |
| Accrued expenses | | | 487 | | | 454 | |
| Convertible note payable, current portion | | | 40 | | | 110 | |
| Total current liabilities | | | 886 | | | 716 | |
| | | | | | | | |
Convertible note payable, net of current portion | | | 70 | | | | |
| Total liabilities | | | 956 | | | 716 | |
| | | | | | | | |
Stockholders' equity: | | | | | | | |
| Preferred stock, $.01 par value; shares authorized - 5,000; | | | | | | | |
| issued and outstanding - none | | | | | | | |
| Common stock, $.001 par value; shares authorized - 150,000 | | | | | | | |
| issued and outstanding - 66,596 and 82,821 | | | 66 | | | 83 | |
| Additional paid-in capital | | | 44,318 | | | 51,323 | |
| Accumulated deficit | | | (44,250 | ) | | (46,982 | ) |
| Total stockholders' equity | | | 134 | | | 4,424 | |
| TOTAL | | $ | 1,090 | | $ | 5,140 | |
See Notes to Condensed Financial Statements
(unaudited)
| | | (In thousands, except for per share data) | |
| | | | | | |
| | | Six months ended | |
| | | June 30, | |
| | | 2005 | | 2006 | |
Cash flows from operating activities: | | | | | | | |
| Net loss | | $ | (1,147 | ) | $ | (2,732 | ) |
| Adjustments to reconcile net (loss) to | | | | | | | |
| net cash used in operating activities: | | | | | | | |
| Depreciation | | | 15 | | | 15 | |
| Amortization of acquired technology | | | 34 | | | 34 | |
| Stock based compensation | | | 10 | | | 1,230 | |
| Changes in operating assets and liabilities: | | | | | | | |
| Decrease/(increase) in prepaid expenses | | | 40 | | | (53 | ) |
| (Decrease) in accounts payable | | | (15 | ) | | (207 | ) |
| Increase/(decrease) in accrued expenses | | | (44 | ) | | (33 | ) |
| Net cash used in operating activities | | | (1,107 | ) | | (1,746 | ) |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | |
| Purchase of furniture and equipment | | | | | | (21 | ) |
| Net cash used in investing activities | | | | | | (21 | ) |
| | | | | | | | |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | |
| Proceeds from issuance of common stock | | | | | | 5,783 | |
| Proceeds from exercise of stock options and warrants | | | 796 | | | 9 | |
| Net cash provided by financing activities | | | 796 | | | 5,792 | |
| | | | | | | | |
| Net Increase/(decrease) in cash and cash equivalents | | | (311 | ) | | 4,025 | |
| Cash and cash equivalents at beginning of period | | | 1,861 | | | 735 | |
| Cash and cash equivalents at end of period | | $ | 1,550 | | $ | 4,760 | |
| | | | | | | | |
| Supplemental disclosure of cash flow information | | | | | | | |
| Non-cash investing and financing activities: | | | | | | | |
| Offering costs paid in common shares | | | | | $ | 449 | |
See Notes to Condensed Financial Statements
SYNTHEMED, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
The accompanying condensed financial statements do not include all of the information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles; but, in the opinion of management, contain all adjustments (which consist of only normal recurring adjustments) necessary for a fair presentation of such financial information. Results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal years. These condensed financial statements have been presented on a going concern basis and do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. These condensed financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2005 included in the Company's Annual Report on Form 10-KSB filed with the Securities and Exchange Commission.
| B) | Stock Based Compensation Plans |
At June 30, 2006, the Company has three stock-based compensation plans: the 2000 Non-Qualified Stock Option Plan, which may issue non-qualified stock options to purchase up to an aggregate of 1,000,000 shares of common stock; the 2001 Non-Qualified Stock Option Plan, which may issue non-qualified stock options to purchase up to an aggregate of 10,000,000 shares of common stock and the 2006 Stock Option Plan, which may issue incentive stock options and non-qualified stock options to purchase up to an aggregate of 5,000,000 shares of common stock. At June 30, 2006, there were 3,931,000 options available for grant under these plans. The exercise price is determined by the Compensation Committee of the Board of Directors at the time of the granting of an option. Options vest over a period not greater than five years, and expire no later than ten years from the date of grant.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share Based Payment.” The Company elected to use the modified prospective transition method, therefore, prior period results were not restated. Prior to the adoption of SFAS 123R, stock-based compensation expense related to stock options was not recognized in the results of operations if the exercise price was at least equal to the market value of the common stock on the grant date, in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”. As a result, the recognition of stock-based compensation expense was generally limited to the expense attributed to stock option modifications, as well as the amortization of certain acquisition-related deferred compensation.
SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the requisite service period (generally the vesting period) in the consolidated financial statements based on their fair values. For options with graded vesting, The Company values the stock option grants and recognizes compensation expense as if each vesting portion of the award was a separate award. Under the modified prospective method, awards that were granted, modified, or settled on or after January 1, 2006 are measured and accounted for in accordance with SFAS 123R. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount of expense recognized. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity rather than as an operating activity.
No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for substantially all net deferred tax assets. We elected to adopt the alternative method of calculating the historical pool of windfall tax benefits as permitted by FASB Staff Position (FSP) No. SFAS 123R-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.” This is a simplified method to determine the pool of windfall tax benefits that is used in determining the tax effects of stock
compensation in the results of operations and cash flow reporting for awards that were outstanding as of the adoption of SFAS 123R.
The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied for the interim period ended June 30, 2005 (in thousands, except for per share data):
| | | Six Months Ended June 30, 2005 | |
| Reported net loss | | $ | (1,147 | ) |
| | | | | |
Stock-based employee compensation expense Included in reported net loss | | | | |
Stock-based employee compensation determined Under the fair value based method | | | (347 | ) |
| | | | | |
| Pro Forma net income | | $ | (1,494 | ) |
| | | | | |
Loss per common share attributable to common Stockholders (basic and diluted): | | | | |
| As reported | | $ | (0.02 | ) |
| Pro forma | | $ | (0.02 | ) |
The Company uses the Black-Scholes option pricing model to determine the weighted average fair value of options. The fair value of options at date of grant and the assumptions utilized to determine such values are indicated in the following table:
| | | Six Months Ended June 30, | |
| | | 2006 | | 2005 | |
| | | | | | |
| Weighted average fair value at date of grant for options granted during the period | | $ | .73 | | $ | .30 | |
| | | | | | | | |
| Risk-free interest rates | | | 5.07 | % | | 3.80 | % |
| Expected option life in years | | | 7-10 | | | 7 | |
| Expected stock price volatility | | | 99 | % | | 100 | % |
| Expected dividend yield | | | -0- | | | -0- | |
The following summarizes the activity of the Company’s stock options for the six months ended June 30, 2006 (in thousands, except per share data):
| | | Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value | |
| Number of shares under option plans: | | | | | | | | | | | | | |
| Outstanding at January 1, 2006 | | | 12,081 | | $ | 0.34 | | | 4 Years | | | | |
| Granted | | | 1,410 | | | 0.80 | | | 9.6 Years | | | | |
| Exercised | | | (100 | ) | | 0.09 | | | | | | | |
| Canceled or expired | | | 0 | | | | | | | | | | |
| Outstanding at June 30, 2006 | | | 13,391 | | $ | 0.39 | | | 3.9 Years* | | $ | 6,028,895 | |
| | | | | | | | | | | | | | |
| Exercisable at June 30, 2006 | | | 12,332 | | $ | 0.36 | | | 3.9 Years* | | $ | 5,835,430 | |
* During the six months ended June 30, 2006, the Company extended the expiration date of various options by one year, with exercise prices ranging from $0.05 - $4.75 and expiration dates ranging from 3/31/06 - 12/27/06, granted to employees, directors, consultants and former employees and directors. As a result of this option modification, the Company recorded an expense of approximately $384,000. The Company calculated the incremental value based on the excess of the fair value of the modified award based on circumstances over the fair value of the original option measured immediately before its terms were modified based on current circumstances using the Black Scholes option pricing model.
The total intrinsic value of options exercised during the six-months ended June 30, 2006 was $66,000.
The following summarizes the activity of the Company’s stock options that have not vested for the six months ended June 30, 2006 (in thousands, except per share data):
| | | Shares | | Weighted Average Exercise Price | |
| Nonvested at January 1, 2006 | | | 1,214 | | $ | 0.60 | |
| Granted | | | 1,410 | | | 0.80 | |
| Canceled or expired | | | 0 | | | | |
| Vested | | | 1,565 | | | 0.68 | |
| Nonvested at June 30, 2006 | | | 1,059 | | $ | 0.74 | |
As of June 30, 2006, there was approximately $443,000 of unrecognized stock compensation related to unvested awards (net of estimated forfeitures) expected to be recognized over the next 15 months.
The Company granted 1,435,000 and 1,410,000 options in the periods ended June 30, 2005 and 2006, respectively.
Under SFAS 123R forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate. Under SFAS 123 and APB 25, the Company elected to account for forfeitures when awards were actually forfeited, at which time all previous pro forma expense was reversed to reduce pro forma expense for that period.
At June 30, 2006, the Company had 175,000 options outstanding which vest upon FDA approval of certain planned products: 125,000 options associated with the PMA approval for REPEL-CVÔ Adhesion Barrier and 50,000 options associated with the IND approval of a drug delivery development program. The Company also has 35,000 options that vest upon the one year anniversary of the PMA approval for REPEL-CV. These options have a term ranging from 5 - 10 years from date of grant and an exercise price range of $0.26 to $2.00. At this time, the Company cannot determine when the FDA approvals will be obtained.
In March 2003, the Company purchased certain polymer technology from Phairson Medical, Ltd., a private medical technology company based in the United Kingdom, for approximately 6,896,000 shares of restricted common stock of the Company. These assets comprise a series of United States and foreign patent applications as well as scientific and clinical documentation. In connection with this transaction, the Company recorded $344,000 as the fair value of this technology which includes (i) $330,000, representing the deemed value of the shares issued (approximately $0.0478 per share) paid by investors in the contemporaneous private placement of Series C Convertible Preferred Stock and related warrants; (ii) $11,000 in transaction-related costs and (iii) $3,000 representing the fair value of the options issued as a finder’s fee. A useful life of 5 years was assigned to the acquired technology considering the stage of product development, the estimated period during which patent protection could be enforced, which would go well beyond five years from the acquisition date, the
development cycle time for medical devices of the type envisioned by the Company based on such technology, as well as potential technology obsolescence over time. For each of the periods ended June 30, 2005 and 2006, the Company recorded amortization of $34,000.
The fair value of the options to purchase 100,000 shares of common stock issued as a finder’s fee was determined to be $3,000 at the time of the transaction using the Black Scholes pricing model.
| D) | Net Loss Per Common Share |
Basic and diluted net loss per common share is computed using the weighted average number of shares outstanding during each period, which excludes potential common shares issuable from the exercise of outstanding options and warrants since their inclusion would have been be anti-dilutive.
In March 2005, the Company received proceeds of $796,000 from the exercise of warrants to purchase 6,634,000 shares of the Company’s common stock. The warrants were issued in the Series C Convertible Preferred Stock private placement in March 2003.
In February 2006, the Company received proceeds of $9,000 from the exercise of options to purchase 100,000 shares of the Company’s common stock.
In April 2006, the Company sold an aggregate of 15,000,000 shares of common stock in a private placement at a purchase price of $.40 per share, resulting in gross cash proceeds of $6,000,000. In connection with the financing, the Company paid a placement agent a commission equal to $590,000, representing 10% of the proceeds raised by the agent ($449,840 of which was paid, at the agent’s election, by issuance of 1,124,600 shares of common stock at the offering price of $0.40 per share, and the balance of which was paid in cash) and the Company issued to the placement agent warrants to purchase an aggregate of 1,475,000 shares of common stock, representing 10% of the number of shares sold by the agent in the financing. The warrants are exercisable at an exercise price equal to $.60 per share at any time until April 3, 2010. The Company paid offering costs of $78,000 including amounts to the placement agent for certain financing-related expenses including legal fees.
In connection with the financing, the Company entered into subscription agreements and an investor rights agreement with the investors, as well as an agency agreement with the placement agent. Pursuant to the investor rights agreement, the Company filed a registration statement with the United States Securities and Exchange Commission covering resale of the securities sold in the private placement which has been declared effective.
| H) | Recent Accounting Pronouncements |
In June 2006, the Financial Accounting Standards Board (“FASB”) has issued interpretation No. 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109” (“FIN 48”), regarding accounting for, and disclosure of, uncertain tax positions. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact FIN 48 will have on its results of operations and financial position.
| Item 2. | Management's Discussion and Analysis or Plan of Operation. |
Certain statements in this Report under this Item 2 and elsewhere constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements regarding future cash requirements, the success of any pending or proposed clinical trial, the timing or ability to achieve necessary regulatory approvals or market launch of REPEL-CV. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such risks and uncertainties include but are not limited to (i) potential adverse developments regarding the progress, timing and results of the pivotal clinical trial and the Company’s efforts to obtain required FDA and other approvals; (ii) potential inability to secure funding as and when needed to support the Company’s activities and (iii) unanticipated delays associated with manufacturing and marketing activities. Reference is made to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2005 and Registration Statement on Form SB-2 declared effective on August 1, 2006 (No. 333-134746) for a description of some of these risks and uncertainties. Without limiting the foregoing, the words “anticipates”, “plans”, “intends”, “expects” and similar expressions are intended to identify such forward-looking statements that speak only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to these forward- looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
General
SyntheMed, Inc. is a biomaterials company engaged in the development and commercialization of innovative and cost-effective medical devices for therapeutic applications. Products under development, all of which are based on the Company’s licensed proprietary, bioresorbable polymer technology, are surgical implants designed to prevent or reduce the formation of adhesions (scar tissue) following a broad range of surgical procedures. The Company’s product development efforts are currently focused on its lead product, REPEL-CVÔ Adhesion Barrier, for use in cardiac surgery. In October 2003, the Company initiated the US-based multi-center pivotal clinical trial for REPEL-CV and anticipates that the trial will be completed in the third quarter of 2006. Assuming a favorable outcome, the Company anticipates submitting the results of the trial to the FDA as a basis for obtaining approval to market REPEL-CV in the United States for use in cardiac surgery. In February 2006, the Company announced completion of patient enrollment for the multi-center pivotal clinical trial for REPEL-CV. In June 2006, the Company announced the successful completion of a multi-center clinical study for REPEL-CV involving several leading cardiac surgery centers in Europe. At the point of the second surgical procedure, 13 of the 15 patients in the study were free of clinically-significant adhesions representing a significant improvement over the typical experience among patients who have undergone secondary open heart procedures. The Company anticipates receiving, in the third quarter of 2006, the CE Mark approval to market REPEL-CV for use in cardiac surgery within the European Union and in other international markets.
The Company's bioresorbable polymer technology is based on a proprietary group of polymers. The Company believes that these polymers display desirable properties, which enable them to be tailored to a wide variety of applications. These properties include bioresorbability, flexibility, strength and biocompatibility. Potential applications for products derived from these polymers are in medical areas such as the prevention of post-operative adhesions, sutures, stents, implantable device coatings and drug delivery.
Results of Operations
The Company incurred research and development expenses of $563,000 and $888,000 for the three month and six month periods ended June 30, 2006 compared to $364,000 and $694,000 for the comparable prior year periods, respectively. The increases in expenditures compared to the prior year is primarily attributable to higher compensation, manufacturing development and product liability insurance expenditures incurred during 2006.
General and administrative expenses totaled $1,223,000 and $1,820,000 for the three months and six months ended June 30, 2006, compared to $277,000 and $466,000 for the comparable prior year periods, respectively. The increases in expenditures compared to the prior year periods are primarily attributable to non-cash charges of $819,000 and $1,230,000, respectively, associated with the adoption of SFAS 123R stock-based compensation expense and the modification of the term of certain stock options.
Results of Operations (continued)
The Company incurred sales and marketing expenses of $57,000 and $94,000 for the three months and six months ended June 30, 2006; there were no comparable expenses during the prior year period. These expenses are primarily associated with REPEL-CV pre-launch marketing costs in the European markets.
There was interest income of $50,000 for the three months and six months ended June 30, 2006 compared to $9,000 and $16,000 for the comparable prior year periods, respectively. The increases compared to the prior year are primarily attributable to higher average cash balances and higher interest rates.
A gain on settlement of debt of $22,000 was recorded in the three months and six months ended June 30, 2006 associated with the settlement of outstanding trade payables; there were no comparable amounts recorded during the prior year periods.
Interest expense of $1,000 and $3,000 for the three months and six months ended June 30, 2006 was equal to the amounts recorded in the comparable prior year periods, respectively.
The Company’s net loss was $1,771,000 and $2,732,000 for the three months and six months ended June 30, 2006 compared to $633,000 and $1,147,000 for the comparable prior year periods, respectively. The Company expects to incur losses in future periods.
Liquidity and Capital Resources
The cash balances were $4,760,000 and $735,000 at June 30, 2006 and December 31, 2005, respectively. At June 30, 2006, the Company had working capital of $4,191,000.
Net cash used in operating activities was $1,746,000 for the six months ended June 30, 2006 as compared to $1,107,000 for the prior year period. Net cash used in operating activities for the current year period was primarily due to a net loss of $2,732,000 partially offset by the impact of $1,230,000 in non-cash expenses comprised of stock-based compensation expenses, primarily due to the adoption of SFAS 123R and the modification of options which extended the exercise period by one year which were partially offset by a reduction of $240,000 in accounts payable and accrued expenses. Net cash used in operating activities for the prior year period was primarily due to a net loss of $1,147,000.
Net cash used in investing activities was $21,000 for the six months ended June 30, 2006; there was no comparable figure for the prior year. Net cash used in investing activities was primarily associated with the acquisition of office furniture and computer and telephone equipment.
Net cash provided from financing activities for the six months ended June 30, 2006 was $5,792,000 as compared to $796,000 for the prior year period. The current year amount was comprised of $5,783,000 of net proceeds from the sale of common stock and $9,000 from the exercise of outstanding options; the prior year amount resulted from the exercise of stock options and warrants.
The Company’s convertible notes payable balance of $110,000 as of June 30, 2006 consists of notes with principal amounts of $40,000 and $70,000 maturing on August 6, 2006 and February 22, 2007, respectively.
The report of the Company’s independent auditors relating to the 2005 financial statements contains an explanatory paragraph stating that certain conditions raise doubt about the Company’s ability to continue as a going concern. In April 2006, the Company completed a private placement in which it received $6.0 million in gross proceeds in consideration for the issuance of 15.0 million shares of common stock. (See Note G of Notes to Condensed Financial Statements.) Based on the current plan of operation, the Company anticipates that its cash balances at June 30, 2006, together with anticipated revenue from sales of REPEL-CV, should be sufficient to fund cash requirements for the next twelve months.
Liquidity and Capital Resources (continued)
As of June 30, 2006, the Company had employment agreements with three executives that expire in September 2006, March 2009 and May 2009, respectively. Pursuant to these agreements, the Company’s commitment regarding cash severance benefits aggregates $458,000 at June 30, 2006. The Company has also entered into change of control agreements with its two executive officers pursuant to which, upon the occurrence of events described therein, the Company could become obligated, in addition to certain other benefits, to pay amounts equal to 200% and 150% of such officers’ annual base salaries, respectively, plus the greater of the prior year’s cash bonus or current year’s target bonus. Any severance payments under the employment agreements would offset amounts required to be paid under the change of control agreements.
| Item 3. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The chief executive officer who is also the chief financial officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e); collectively, “Disclosure Controls”) as of the end of the period covered by this quarterly report (the "Evaluation Date") has concluded that as of the Evaluation Date, our Disclosure Controls were effective to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified by the SEC, and that material information relating to our company and any consolidated subsidiaries is made known to management, including the chief executive officer and chief financial officer, particularly during the period when our periodic reports are being prepared to allow timely decisions regarding required disclosure.
In connection with the evaluation referred to in the foregoing paragraph, we have identified no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
The Company’s management, including the chief executive officer and chief financial officer, who are the same person, does not expect that our Disclosure Controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
PART II - OTHER INFORMATION
On April 25, 2006, the Company’s Board of Directors approved a performance-based bonus arrangement for Mr. Robert Hickey, the Company’s President, CEO and CFO, and Dr. Eli Pines, the Company’s Vice President and Chief Scientific Officer. Under the arrangement, Mr. Hickey would be entitled to a maximum cash bonus equal to $60,000 and Dr. Pines would be entitled to a maximum cash bonus equal to $35,000, in each case upon satisfaction of specific performance criteria covering a one-year period that began in April 2006 at the time of the Company’s most recent annual meeting. Criteria upon which Mr. Hickey’s bonus would be based include staffing, corporate image, product development and sales and
marketing activities. Criteria applicable to Dr. Pines’ bonus include activities relating to ongoing US clinical studies, manufacturing and quality control-related activities, regulatory matters and new product development activities.
Item 6. Exhibits
31.1 Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | SyntheMed, Inc.
By: /s/ Robert P. Hickey Robert P. Hickey President, CEO and CFO Date: August 7, 2006 |
EXHIBIT INDEX
ITEM
31.1 Certification of Principal Executive Officer and Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
