================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO 2 ON
FORM 10-K/A
TO ANNUAL REPORT ON FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period __________ to __________
COMMISSION FILE NUMBER: 0-20580
LIFE MEDICAL SCIENCES, 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.)
P.O. Box 219, Little Silver, New Jersey 07739
(Address of principal executive offices) (Zip Code)
(732) 728-1769
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
(Title of each class)
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK--PAR VALUE $.001 PER SHARE
UNITS
REDEEMABLE CLASS A WARRANTS
REDEEMABLE CLASS B WARRANTS
(Title of class)
Indicate by check mark whether the registrant (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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the common equity held by non-affiliates of
the registrant as of March 8, 2002 was approximately $4.5 million.
As of March 8, 2002, 15,535,650 shares of Common Stock, $.001 par value,
of the registrant were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement to be filed
pursuant to Regulation 14A in connection with solicitation of proxies for its
2002 Annual Meeting of Stockholders are incorporated by reference into Part III
of this Form 10-K.
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Explanatory Note
This Amendment is being filed to effect a correction to the last sentence
of the second paragraph of Note M[1] to the Notes to Financial Statements, as
well as to include a revised Consent of Independent Auditors (Exhibit 23.1). The
correction to Note M[1] was described in a prior Amendment to the 10-K filed
March 26, 2002, but the full text of the financial statements and notes were
erroneously omitted from that Amendment.
1
Item 8. Financial Statements and Supplementary Data
The Index to Financial Statements appears on page F-1, the Report of
Independent Auditors appears on page F-2, and the Financial Statements and Notes
to Financial Statements appear on pages F-3 to F-15.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements.
An Index to Financial Statements appears on page F-1.
2. Schedules.
None
3. Exhibits.
3.1 Restated Certificate of Incorporation of Registrant, filed
December 26, 1991, as amended. (1)
3.1(a) Amendment to Restated Certificate of Incorporation, dated August
21, 1992. (1)
3.1(b) Certificate of Designations, Rights and Preferences of Series A
Convertible Preferred Stock. (11)
3.1(c) Amendment to Restated Certificate of Incorporation, dated
December 14, 2000. (12)
3.1(d) Certificate of Designations, Rights and Preferences of Series B
Convertible Preferred Stock (see forms attached in Exhibit
10.32) (12)
3.2 By-Laws of Registrant. (1)
3.2(a) Amendment No. 1 to the By-Laws of Registrant. (11)
10 The 2000 Stock Option. Plan (10)
10.1 Amended and Restated 1992 Stock Option Plan of Registrant. (8)
(9)
10.2 Form of Non-Qualified Option Agreement granted outside of a Plan
to certain Directors and Officers (10)
2
10.3 Agreement, dated June 14, 1991, between Registrant and Yissum
Research Development Company of the Hebrew University of
Jerusalem ("Yissum"). (1)
10.4 Form of Indemnification Agreement entered into between
Registrant and certain officers and directors of Registrant. (2)
10.8 Assignment of certain rights relating to the polymer technology
to Registrant by Yissum. (3)
10.9 Form of Non-Qualified Stock Option Agreement. (4) (9)
10.10 Form of Incentive Stock Option Agreement. (4) (9)
10.11 Asset Purchase Agreement between Registrant and MedChem
Products, Inc. dated as of July 29, 1994. (5)
10.14 Warrant Agreement among Registrant, D. H. Blair Investment
Banking Corp. and American Stock Transfer & Trust Company
including forms of Class A and Class B Warrants. (6)
10.15 Warrant Agreement between Registrant and American Stock Transfer
and Trust Company. (6)
10.16 Agreement, dated as of February 1994, between Registrant and
Yissum. (6)
10.19 Amendment No. 2 dated as of January 1, 1996 to the Agreement
between the Registrant and Yissum. (2)
10.23 Warrant Agreement between Registrant and Wedbush Morgan
Securities. (7)
10.24 Underwriting Agreement between Registrant and Wedbush Morgan
Securities. (7)
10.27 Amendment No. 3 dated as of October 1, 1996 to the Agreement
between the Registrant and Yissum. (2)
10.29 Series A Preferred Stock Purchase Agreement dated December 15,
2000. (11)
10.30 Investor Rights Agreement dated December 15, 2000. (11)
10.31 2001 Non-Qualified Stock Option Plan and Stock Option
Agreement. (12)
10.32 Series B Subscription Agreement dated March 21, 2002. (12)
10.33 Agency Agreement between Registrant and Clubb BioCapital, Ltd.
dated March 21, 2002. (12)
10.34 Employment Agreement between Registrant and Robert P. Hickey
dated May 21, 2001. (12)
10.35 Convertible Promissory Note between Registrant and Dimotech,
Ltd. dated August 6, 2001. (12)
10.36 Convertible Promissory Note between Registrant and Polymer
Technology Group, Inc. dated February 22, 2002. (12)
23.1 Consent of Richard A. Eisner & Company, LLP. *
* Filed herewith.
-----------------------
3
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 33-94008) declared effective on September 22, 1992.
(2) Incorporated by reference to Registrant's Registration Statement on Form
S-1 (File No. 333-02588) declared effective on May 3, 1996.
(3) Incorporated by reference to the Registrant's report on Form 10-Q for the
quarter ended September 30, 1992.
(4) Incorporated by reference to the Registrant's report on Form 10-K for the
year ended December 31, 1993.
(5) Incorporated by reference to the Registrant's report on Form 8-K filed by
the Company on August 12, 1994.
(6) Incorporated by reference to the Registrant's report on Form 10-K for the
year ended December 31, 1994.
(7) Incorporated by reference to the Registrant's report on Form 10-K for the
year ended December 31, 1996.
(8) Incorporated by reference to the Registrant's report on Form 10-Q for the
quarter ended June 30, 1997.
(9) Includes compensatory plan and or arrangements required to be filed
pursuant to item 14 (c) of Form 10-K.
(10) Incorporated by reference to the Registrant's S-8 filed in January 2000.
(11) Incorporated by reference to the Registrant's 8-K filed in January 2001.
(12) Incorporated by reference to the original filing of this report on Form
10-K filed March 22, 2002.
(b) Reports on Form 8-K
None
(c) See (a) 3.
4
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.
Life Medical Sciences, Inc.
(Registrant)
By: /s/ Robert P. Hickey
------------------------
Robert P. Hickey
Chairman, President, CEO and CFO
(principal executive, financial and
accounting officer)
Dated: April 9, 2002
5
INDEX TO FINANCIAL STATEMENTS
Page Number
-----------
Independent Auditors' Report ..................................... F-2
Balance Sheets ................................................... F-3
Statements of Operations ......................................... F-4
Statements of Changes In Capital Deficit ......................... F-5
Statements of Cash Flows ......................................... F-6
Notes to Financial Statements .................................... F-7
F-1
Independent Auditors' Report
Board of Directors and Stockholders
Life Medical Sciences, Inc.
Little Silver, New Jersey
We have audited the accompanying balance sheets of Life Medical Sciences,
Inc. as of December 31, 2000 and 2001 and the related statements of operations,
changes in capital deficit and cash flows for each of the years in the
three-year period ended December 31, 2001. 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 enumerated above present fairly,
in all material respects, the financial position of Life Medical Sciences, Inc.
as of December 31, 2000 and 2001 and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has sustained recurring losses from
operations, and has both a working capital and capital deficit at December 31,
2001. As a result, the Company has limited capital resources for its continuing
operations, which raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also discussed
in Note A. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Richard A. Eisner & Company, LLP
New York, New York
February 28, 2002
With respect to NOTE M
March 21, 2002
F-2
LIFE MEDICAL SCIENCES, INC.
BALANCE SHEETS
(In thousands, except per share data)
December 31
--------------------
2000 2001
---- ----
ASSETS
Current assets:
Cash ................................................................ $ 844 $ 372
Deferred financing costs ............................................ 64
Prepaid expenses .................................................... 110 11
-------- --------
Total current assets ........................................ 954 447
Furniture and equipment, less accumulated depreciation .................. 12 2
-------- --------
TOTAL ................................ $ 966 $ 449
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Capital lease obligation ............................................ $ 16
Accounts payable .................................................... 1,120 $ 901
Accrued expenses .................................................... 162 164
Other liabilities ................................................... 169 76
Convertible promissory notes, net of discount ....................... 348
-------- --------
Total current liabilities ................................... 1,467 1,489
Capital lease obligation, less current portion .......................... 2
Deferred royalty income ................................................. 296 261
Note payable-long term .................................................. 40
-------- --------
Total liabilities ........................................... $ 1,765 $ 1,790
-------- --------
Commitments and other matters (Note H)
Capital deficit:
Preferred stock, $.01 par value: shares authorized - 5,000;
Series A convertible shares issued and outstanding -500 and none .. 5
Common stock, $.001 par value; shares authorized - 43,750;
issued and outstanding -10,343 and 15,343 ......................... 10 15
Additional paid-in capital .......................................... 36,094 36,280
Accumulated deficit ................................................. (36,908) (37,636)
-------- --------
Total capital deficit ....................................... (799) (1,341)
-------- --------
TOTAL ................................ $ 966 $ 449
======== ========
See accompanying notes to financial statements.
F-3
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
-----------------------------
1999 2000 2001
------- ------- -------
Revenues:
Product sales ............................................ $ 1,201 $ 58
Royalty income ........................................... 48 43 $ 35
------- ------- -------
1,249 101 35
Cost of goods sold ......................................... 556 4
------- ------- -------
Gross profit ............................................... 693 97 35
------- ------- -------
Operating expenses:
Research and development expenses ........................ 788 316 473
Sales and marketing ...................................... 437 20
General and administrative expenses ...................... 1,684 759 637
------- ------- -------
Operating expenses ..................................... 2,909 1,095 1,110
------- ------- -------
Loss from operations ....................................... (2,216) (998) (1,075)
Other income/(expense):
Other income ............................................... 3
Interest income ............................................ 16 11 15
Interest expense ........................................... (4) (1) (9)
Amortization of debt discount .............................. (47)
Gain on settlement of debt ................................. 91
------- ------- -------
Loss before benefit for income tax and extraordinary gain .. (2,204) (988) (1,022)
Benefit for income taxes ................................... 817 468 294
------- ------- -------
Loss before extraordinary gain ............................. (1,387) (520) (728)
Extraordinary gain from extinguishment of liability ........ 432 -- --
------- ------- -------
Net loss ................................................... $ (955) $ (520) $ (728)
======= ======= =======
Net loss per common share-basic & diluted:
Loss before extraordinary gain $ (0.16) $ (0.05) $ (0.06)
Extraordinary gain 0.05 -- --
------- ------- -------
Net loss per common share $ (0.11) $ (0.05) $ (0.06)
======= ======= =======
Weighted average shares outstanding - basic & diluted 8,715 10,155 13,069
See accompanying notes to financial statements.
F-4
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF CHANGES IN CAPITAL DEFICIT
(In thousands)
Preferred Common Additional
-------------------- ------------------- Paid In Accumulated
Shares Amount Shares Amount Capital Deficit
-------- -------- -------- -------- ---------- -----------
Balance -January 1, 1999 ......... 7,923 $ 8 34,147 $(35,433)
Common stock issued ............ 1,505 2 748
Fair value of options issued
for compensation ............... 472
Issuance of common stock
in payment of previously
established liabilities ........ 42 20
Net (loss) for the year ........ (955)
-------- -------- -------- -------- -------- --------
Balance - December 31, 1999 ...... 9,470 10 35,387 (36,388)
Stock options exercised ........ 873 116
Fair value of options issued
for compensation ............... 156
Preferred stock issued ......... 500 $ 5 435
Net (loss) for the year ........ (520)
-------- -------- -------- -------- -------- --------
Balance--December 31, 2000 ....... 500 5 10,343 10 36,094 (36,908)
Conversion of preferred stock
into common stock .............. (500) (5) 5,000 5
Fair value of options issued
for compensation ............... 47
Warrants issued with
Convertible promissory notes ... 139
Net (loss) for the year ........ (728)
-------- -------- -------- -------- -------- --------
Balance--December 31, 2001 ....... -- -- 15,343 $ 15 $ 36,280 $(37,636)
======== ======== ======== ======== ======== ========
See accompanying notes to financial statements
F-5
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF CASH FLOWS
(In thousands, except per share data)
Year Ended December 31,
-----------------------
1999 2000 2001
----- ----- -----
Cash flows from operating activities:
Net (loss) ............................................................. $(955) $(520) $(728)
Adjustments to reconcile net (loss) to net cash (used in) operations:
Deferred royalty income ............................................ (47) (43) (35)
Fair value of common stock and options issued as compensation ...... 472 156 8
Depreciation ....................................................... 30 24 5
Loss on sale of equipment .......................................... 14
Gain on settlement of debt ......................................... (91)
Amortization of debt discount ...................................... 47
Changes in operating assets and liabilities:
Decrease in accounts receivable ................................ 120
Decrease in inventory .......................................... 264
(Increase) decrease in prepaid expenses ........................ 14 (91) 99
(Increase) in deferred financing costs ......................... (39)
Decrease in deposits ........................................... 47
Increase (decrease) in accounts payable and accrued expenses ... (522) 103 (119)
Increase (decrease) in other liabilities ....................... 54 (84) (52)
----- ----- -----
Net cash used in operating activities ...................... (523) (441) (905)
----- ----- -----
Cash flows from investing activities:
Purchase of equipment .................................................. (1)
Proceeds from sale of equipment ........................................ 5 --
----- -----
Net cash provided by investing activities .......................... 5 (1)
----- -----
Cash flows from financing activities:
Proceeds from private placement ........................................ 770
Proceeds from exercise of stock options ................................ 116
Proceeds from the issuance of preferred stock .......................... 440
Proceeds from issuance of notes payable ................................ 440
Payment on capital lease obligation .................................... (8) -- (6)
----- ----- -----
Net cash provided by (used in) financing activities ................ 762 556 434
----- ----- -----
Net (decrease) increase in cash ............................................ 239 120 (472)
Cash at beginning of year .................................................. 485 724 844
----- ----- -----
Cash at end of year ........................................................ $ 724 $ 844 $ 372
===== ===== =====
Supplementary cash flow information:
Interest paid
Non-cash investing and financing activities: $ 4 $ 1 $ 1
Reduction of capital lease and accrued interest in exchange for
equipment with a cost basis of $6 16
Conversion of preferred stock to common stock 5
Legal fees accrued in connection with financing 25
Conversion of other liability to note payable 40
Debt discount recorded for fair value of warrants issued with
convertible promissory notes 139
Options issued as consideration for accrued consulting fees 39
See accompanying notes to financial statements.
F-6
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE A) -- The Company and Basis of Presentation:
Life Medical Sciences, Inc. (the "Company") is a biomaterials company
engaged in the development and commercialization of innovative and
cost-effective medical products for therapeutic applications. Products under
development, all of which are based on the Company's proprietary, bioresorbable
polymer technology, are medical devices designed to prevent or reduce the
formation of adhesions (scar tissue) following a broad range of surgical
procedures. With the receipt of approximately $1 million in December 2000,
through a combination of equity financing and the sale of state tax losses, the
Company was able to reinitiate development activities related to its
REPEL-CV(TM) adhesion barrier film that had previously been postponed due to
limited financial resources. During 2001, the Company received advances totaling
$440,000 in the form of non-interest bearing convertible debt from investors in
a larger preferred stock/warrant offering which was completed in March 2002 for
an aggregate of $1.2 million (including the conversion of the convertible debt).
In April 2001, the Board of Directors approved the proposed purchase of all
polymer technology assets from a third party in exchange for the issuance of
approximately 6,900,000 shares of restricted Common Stock. The closing of this
transaction made contingent upon the closing of the Series B Offering and on
shareholder approval of an increase in the Company's authorized Common Stock.
The Company raised an additional $294,000 in December 2001 from the sale of
certain New Jersey state tax losses. The proceeds of these financings are
intended to fund the REPEL-CV clinical trial as well as other product
development and operating expenses.
The accompanying financial statements have been prepared on a going
concern basis. As shown in the accompanying financial statements, the Company
has incurred recurring losses and used cash in operations and has both a working
capital and capital deficit at December 31, 2001. As a result, the Company has
limited capital resources for its continuing operations, which raises
substantial doubt about the Company's ability to continue as a going concern.
The Company's continuation as a going concern is dependent upon obtaining
sufficient financing to fund its operations and ultimately to achieve
profitability, which in turn is dependent on successfully completing the
development of its proposed products, obtaining required regulatory approvals
and manufacturing and selling its proposed products. There is no assurance that
initiatives to raise additional capital will be successful or that other
financing arrangements will be available or that the Company will achieve or
sustain a profitable level of operations. The financial statements do not
include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
(NOTE B) -- Summary of Significant Accounting Policies:
[1] Revenue Recognition:
Product revenue is recognized when product is shipped to customers.
Royalty income is based on the quarterly sales of the Sure-Closure System and
any line extensions or embodiments thereof. Royalties are calculated and
credited to the Company within forty-five days after the last day of each
quarter. The Company recognizes such income when the amounts earned become fixed
and determinable. Royalties earned by the Company are applied to the outstanding
deferred royalty income balance.
[2] Advertising:
Advertising costs are charged to expense as they are incurred. Total
expenditures in 1999 and 2000 were $196,000 and $20,000, respectively; there
were no comparable expenditures in 2001.
[3] Depreciation:
Furniture and equipment are recorded at cost and are depreciated using the
straight-line method based upon an estimated useful life of 5-7 years.
F-7
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(NOTE B) -- Summary of Significant Accounting Policies: (continued)
[4] Research and development:
Substantially all research and development activities are conducted
through arrangements with specialized academic and industrial organizations (see
Note G). Research and development costs are charged to expense as incurred.
[5] Patent costs:
Costs incurred in connection with acquiring patent rights and the
protection of proprietary technologies are charged to expense as incurred.
[6] Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management 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 revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
[7] Stock based compensation:
The Company follows the intrinsic value based method in accounting for
stock-based employee compensation under Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", and related interpretations. The
Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation".
The Company follows the fair value method in accounting for stock based
compensation to non-employees.
[8] Earnings(Loss) per share:
Basic earnings (loss) per share is computed by dividing the income or loss
by the weighted average number of shares of common stock outstanding during each
period. Diluted earnings (loss) per share includes the effect, if dilutive, from
the potential exercise or conversion of securities which would result in the
issuance of incremental shares of common stock. Securities and the related
number of common shares not included in the diluted computation that would
potentially dilute basic earnings per share, if any in the future, are as
follows:
Dilutive potential Common Shares
for the year ended December 31,
--------------------------------
1999 2000 2001
---- ---- ----
Convertible promissory notes 3,707,000
Convertible preferred stock 5,000,000
Options 4,465,000 3,701,000 3,841,000
Warrants 4,968,000 4,968,000 8,635,000
--------- ---------- ----------
9,433,000 13,669,000 16,183,000
========= ========== ==========
F-8
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(NOTE C) -- Furniture and Equipment:
Furniture and equipment consists of the following at December 31:
Estimated
2000 2001 useful life
------- ------- -----------
Furniture and fixtures $11,000 $10,000 5 - 7 years
Office equipment 48,000 8,000 5 years
------- -------
Less accumulated 59,000 18,000
depreciation 47,000 16,000
------- -------
$12,000 $ 2,000
======= =======
(NOTE D) -- Convertible Promissory Notes:
In September 2001 and November 2001, the Company executed $440,000 in six
month, non-interest bearing Convertible Promissory Notes. In connection
therewith, the Company issued warrants to purchase up to 3,667,000 shares of
Common Stock at an exercise price of $0.12 per share which expire on June 30,
2002. Upon the closing of the Series B Offering, the notes, together with the
warrants were converted into 367,000 Units (See Note M). The estimated fair
value of the warrants of $139,000 was recorded as debt discount of which $47,000
was amortized through December 31, 2001.
(NOTE E) -- Capital Deficit:
[1] Common stock:
In June 1999, the Company completed a private placement in which 1,505,003
shares of Common Stock were sold to "accredited investors" as defined in Rule
501 of Regulation D in consideration for cash proceeds of $750,000. In June
2001, the Company issued 5,000,000 shares of Common Stock pursuant to the
automatic conversion of 500,000 shares of Series A Convertible Preferred Stock
which were issued in December 2000.
[2] Preferred stock:
In December 2000, the Company completed a private placement in which
500,000 shares of Series A convertible preferred stock were sold to "accredited
investors" as defined in Rule 501 of Regulation D in consideration for cash
proceeds of $500,000. Pursuant to the terms, each share of Series A preferred
stock was converted into 10 shares of the Company's Common Stock during 2001.
[3] Warrants:
The following table summarizes outstanding warrants and Common Shares
underlying such warrants at December 31, 2001:
Exercise
Warrants Price Shares
-------- ----- ------
Outstanding Class A warrants 1,650,000 $8.40 1,768,000
Class B warrants underlying Class A warrants 1,650,000 12.60 1,768,000
Outstanding Class B warrants 1,150,000 12.60 1,232,000
Warrants issued with convertible promissory notes 3,667,000 .12 3,667,000
Underwriter warrants 200,000 7.95 200,000
---------
8,635,000
=========
F-9
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(NOTE E) -- Capital Deficit: (Continued)
[3] Warrants: (Continued)
In 1992, the Company consummated its initial public offering of 1,150,000
units, each unit consisting of one share of common stock and two warrants. The
warrants included in each unit consist of a redeemable Class A Warrant and a
redeemable Class B Warrant. Each Class A Warrant entitles the holder to
purchase, at an exercise price of $8.40, subject to adjustment, 1.071474 shares
of Common Stock and one Class B Warrant. Each Class B Warrant entitles the
holder to purchase, at an exercise price of $12.60, subject to adjustment,
1.071474 shares of Common Stock. The warrants are redeemable by the Company for
$.05 per warrant on 30 days written notice under certain circumstances.
In 1993, the Company consummated a public offering of 500,000 units; each
unit consisting of two shares of common stock and one Class A Warrant.
At December 31, 2001 there were 1,650,000 Class A Warrants and 1,150,000
Class B Warrants outstanding. The warrants'expiration date has been extended to
March 21, 2002.
The Company sold to the underwriter of its public offering in May 1996,
for nominal consideration, a warrant to purchase 200,000 shares of Common Stock.
The warrant has an exercise price of $7.95 per share and expires in May 2002.
[4] Options:
The Company may issue options to purchase up to an aggregate of 1,408,000
shares of Common Stock pursuant to its 1992 Stock Option Plan, as amended (the
"1992 Plan"), 1,000,000 shares of Common Stock pursuant to its 2000
Non-Qualified Stock Option Plan (the "2000 Plan") and 10,000,000 shares of
Common Stock pursuant to its 2001 Non-Qualified Stock Option Plan (the "2001
Plan"). Options to purchase shares may be granted under the 1992 Plan to persons
who, in the case of incentive stock options, are employees of the Company; or,
in the case of SARs and nonstatutory stock options, are officers and key
employees of the Company, or agents, medical and scientific advisors, directors
of or consultants to the Company, whether or not otherwise employed by the
Company. Under the 2000 Plan and the 2001 Plan only non-qualified stock options
may be granted to employees and directors of the Company or agents, medical and
scientific advisors, or consultants to the Company. In the case of the 1992
Plan, the 2000 Plan and the 2001 Plan, the exercise price is determined by the
Compensation Committee of the Board of Directors at the time of the granting of
an option, but in the case of an incentive stock option, the exercise price
shall not be less than the fair market value of the stock on the date of grant.
Options and SARs vest over a period not greater than five years, and expire no
later than ten years from the date of grant.
At December 31, 2001, options to purchase 150,000 shares of Common Stock
pursuant to the 1992 Plan, 782,000 shares of Common Stock pursuant to the 2000
Plan and 239,000 shares of Common Stock pursuant to the 2001 Plan are
outstanding. In addition, options to purchase 2,670,000 shares of Common Stock
are outstanding pursuant to other agreements. These options vest over various
periods and expire no later than ten years from the date of vesting. At December
31, 2001, there were 11,141,000 options available for grant under these plans.
Operating expenses include the following charges relating to stock
options:
Year ended December 31,
-----------------------
1999 2000 2001
---- ---- ----
Directors fees $ 26,000 $ 17,000
Options in lieu of salaries 296,000
Consulting fees 150,000 139,000 $8,000
-------- -------- ------
$472,000 $156,000 $8,000
======== ======== ======
F-10
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(NOTE E) -- Capital Deficit: (Continued)
[4] Options: (Continued)
In addition, 39,000 options were granted in consideration for $39,000 of
consulting fees previously charged to research and development expense.
Had compensation cost for the Company's stock option grants to employees
been determined based on the fair value at the grant dates for awards consistent
with the method of SFAS No. 123, the Company's net loss and loss per share would
have been increased to the pro forma amounts indicated below (in thousands,
except per share data).
1999 2000 2001
---- ---- ----
Net loss As reported $(955) $(520) $(728)
Pro forma $(1,297) $(666) $(746)
Net loss per share-
basic & diluted As reported $(0.11) $(0.05) $(0.06)
Pro forma $(0.15) $(0.07) $(0.06)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
Year ended December 31,
-----------------------
1999 2000 2001
---- ---- ----
Dividend growth 0% 0% 0%
Expected volatility 82% 88% 99%
Risk free interest rate 5.5-6.3% 4.5-5.9% 4.1-4.4%
Expected life 2.5 years 2.5 years 2.5 years
A summary of the status of the Company's stock options as of December 31,
1999, 2000 and 2001, and changes during the years ended on those dates is
presented below (in thousands, except per share data):
1999 2000 2001
---------------------------- ---------------------------- ----------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding at
beginning of year 2,928 $2.13 4,465 $1.31 3,701 $1.24
Granted 1,889 0.50 782 0.35 239 0.21
Exercised -- -- (873) 0.13 -- --
Forfeited (352) 3.78 (672) 2.09 (99) 1.63
Outstanding at end
of year 4,465 1.31 3,701 1.24 3,841 1.17
Options exercisable
at year-end 4,042 1.24 3,464 1.19 3,566 1.10
Weighted-average
grant date fair
value of options
granted during the
year 0.33 0.32 0.12
F-11
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(NOTE E) -- Capital Deficit: (Continued)
[4] Options: (Continued)
Included in the preceding table are 558,000, 306,000 and 89,000 options
granted to non-employees in 1999, 2000 and 2001, respectively. The weighted
average grant date fair values of such options was $0.27, $0.45 and $0.13,
respectively.
The following table summarizes information about fixed stock options
outstanding at December 31, 2001 (in thousands, except per share data):
Options Outstanding Options Exercisable
------------------------------------------------ ----------------------------
Weighted-Average
Range Number Remaining Weighted-Average Number Weighed Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
$0.02 - 0.82 1,716 5 years $0.20 1,716 $0.20
1.00 - 2.00 1,921 4 years 1.69 1,646 1.64
4.00 - 4.75 189 3 years 4.02 189 4.02
7.00 - 7.88 15 3 years 7.65 15 7.65
----- ------- ----- ----- -----
3,841 4 years $1.17 3,566 1.10
(NOTE F)-- Income Taxes:
At December 31, 2001, the Company has approximately $34,682,000 of net
operating loss carryforwards to offset future federal taxable income and
approximately $610,000 of research and development tax credit carryforwards
available to offset future federal income tax, subject to limitations for
alternative minimum tax. The net operating loss and research and development
credit carryforwards expire in various years from 2005 through 2021. Certain
other limitations may apply, including the amount that may be used annually.
Future issuances of the Company's stock, may subject the Company to additional
limitations.
At December 31, 2001, after giving effect to the sales described in the
following sentence, the Company has net operating loss carryforwards for New
Jersey State income tax purposes of approximately $13,665,000 which expire
through 2008. The Company has participated in the Tax Benefit Transfer Program
administered by the State of New Jersey under which $11,002,000, $6,257,000 and
$3,758,000 in eligible loss carryforwards, covering the tax years 1992 through
1996 and a portion of 1997, were sold to PSE&G in exchange for cash payments of
approximately $817,000, $468,000 and $294,000, in 1999, 2000 and 2001,
respectively. These cash payments are shown as income tax benefits in the
accompanying statements of operations. The Company anticipates similar
transactions during 2002 and beyond, contingent upon approvals from the State
Department of Taxation.
Deferred tax benefits, which amounted to $13,938,000 and $13,900,000 at
December 31, 2000 and 2001 are principally attributable to net operating loss
carryforwards and have been offset by a valuation allowance against the entire
benefit due to management's uncertainty regarding the future profitability of
the Company. The valuation allowance has been decreased by $573,000, $359,000
and $38,000 in 1999, 2000 and 2001, respectively.
The income tax benefit of $817,000, $468,000 and $294,000 for the years
ended December 31, 1999, 2000 and 2001 reflect the Company's participation in
the Tax Benefit Transfer Program described above.
F-12
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(NOTE F) -- Income Taxes: (Continued)
The difference between income taxes at the statutory federal income tax
rate and income taxes reported in the statements of operations are attributable
to the following:
Year Ended December 31,
---------------------------------------------
1999 2000 2001
------------ ------------ ------------
Income tax benefit at the federal statutory rate $ (325,000) $ (177,000) $ (248,000)
State and local income taxes, net of effect on federal taxes (57,000) (31,000) (44,000)
Decrease in valuation allowance (573,000) (359,000) (38,000)
Sale of state net operating loss carryforwards (817,000) (468,000) (294,000)
Reduction in deferred tax asset from transfer of state net
operating loss carryforwards 990,000 563,000 338,000
Other (35,000) 4,000 (8,000)
------------ ------------ ------------
$ (817,000) $ (468,000) $ (294,000)
============ ============ ============
The deferred tax asset at December 31 is as follows:
2000 2001
------------ ------------
Net operating loss carryforward $ 13,186,000 $ 13,022,000
Research and development credit carryforward 583,000 610,000
Accrued expenses 141,000 240,000
Other 28,000 28,000
------------ ------------
13,938,000 13,900,000
Valuation allowance (13,938,000) (13,900,000)
------------ ------------
$ 0 $ 0
============ ============
(NOTE G) -- Research and License Agreements:
[1] Yissum agreement:
During June 1991, the Company entered into a research and license
agreement with Yissum Research and Development Company of the Hebrew University
of Jerusalem ("Yissum"), which was amended in February 1994, as of January 1996
and as of October 1996, pursuant to which the Company finances and Yissum
conducts research and development at the Hebrew University of Jerusalem in the
field of biomedical polymers. In connection with the agreement, Yissum assigned
to the Company its worldwide rights to patents, patent applications and know-how
to develop, manufacture and market products relating to this technology.
F-13
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(NOTE G) -- Research and License Agreements: (Continued)
[1] Yissum agreement: (Continued)
Pursuant to the agreement, the Company is obligated to pay a royalty of
five percent of all net sales of the Company's products derived under the
agreement. The maximum amount of royalties to be paid during the term of the
agreement is $5,500,000. The agreement continues until the earlier of the last
date upon which the patents expire, or at the end of fifteen years from the date
of the first commercial sale pursuant to the assignment. Yissum has the right in
its sole discretion to terminate the agreement if, among other things the
Company does not attain certain milestones by specified dates. The January 1996
amendment gives the Company options for three one-year extensions, through 2004,
of the periods in which certain milestones must be attained, each for a payment
of $50,000. Upon termination of the agreement for any reason, the patents,
patent applications and know-how assigned by Yissum to the Company in June 1991
will revert in full to Yissum.
[2] Dimotech agreement:
During July 1995, the Company entered into an agreement with Dimotech
Ltd., pursuant to which the Company financed and Dimotech conducted research and
development with regard to the scar management program. In connection with the
agreement, Dimotech has assigned to the Company its worldwide rights to the
patents and know-how to develop, manufacture and market products relating to
this technology.
Pursuant to the agreement, the Company is obligated to pay a royalty of
five percent of all net sales of the Company's products derived under this
agreement including CLINICEL. The agreement continues until the earlier of the
last date upon which the patents expire, or at the end of fifteen years from the
date of the first commercial sale pursuant to the assignment. Dimotech has the
right in its sole discretion to terminate the agreement under certain
circumstances. Upon termination of the agreement for any reason, the patents,
license and know-how assigned by Dimotech to the Company will revert in full to
Dimotech.
In November 1999, the Company was declared to be in breach of this
agreement by Dimotech due to non-payment of royalties. Effective February 29,
2000, the Company discontinued the manufacture and sale of CLINICEL and the
patent rights reverted to Dimotech. In addition, at December 31, 1999, the
Company wrote off to cost of sales the $186,000 carrying value of the Clincel
products in inventory at such date. The company no longer sells the CLINICEL
products. In August 2001, the Company settled a lawsuit filed in Israel against
the Company and its principal executive officers by Dimotech, Ltd. for the
non-payment of royalties and accrued interest in the amount of $125,000.
Pursuant to the settlement, the Company paid $52,000, issued a $40,000 note
payable (convertible into Common Stock at $1.00 per share) and, at December 31,
2001, reflected $25,000 as accrued expenses which was converted, upon the
closing of the Series B Offering, into 21,000 Series B Units. Dimotech forgave
$8,000 in connection with the settlement.
(NOTE H) -- Commitments and Other Matters:
[1] Lease:
The Company vacated its corporate offices in 2000 and accrued the
remaining obligation on the lease, which expired in October 2001. Rent expense
was $88,000 and $90,000 in 1999 and 2000, respectively. The Company's activities
are being conducted at the premises of the Company's Chief Executive Officer on
a rent-free basis.
[2] Employment agreement:
F-14
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
The Company has an employment agreement with one executive which expires
in May 2002. Pursuant to this agreement, the Company's commitment regarding
early termination benefits aggregates $90,000 at December 31, 2001.
(NOTE H) -- Commitments and Other Matters: (Continued)
[3] Supplier Concentration
The Company intends to rely primarily on one primary manufacturer to
produce its proposed products for testing and commercial purposes. The Company
believes that alternative sources for these raw materials and components are
available.
(NOTE I) -- Sure-Closure System Sale:
In July 1994, the Company sold or assigned to MedChem Products, Inc.
substantially all of its assets related to the Sure-Closure System, a disposable
wound closure device, including rights, agreements and licenses. The terms of
the agreement provide that the Company is entitled to royalties of 10% of the
net sales (as defined in the agreement), through June 30, 2004, of the
Sure-Closure System and any line extensions or future embodiments. In connection
with this transaction, $644,000 was recorded as deferred royalty income and
through December 31, 2001 has been reduced by $383,000 of royalties earned after
October 1, 1995. A number of the Company's agreements with Technion and
Dimotech, related to the Sure-Closure System, were assigned to MedChem in
connection with the sale. In connection with one such agreement, the Company may
be liable for a two percent royalty on sales of the Sure-Closure System in the
event that MedChem does not pay these royalties.
(NOTE J) -- Related Party:
The Company incurred expenses of approximately $67,000, $108,000 and
$94,000 in the years ended December 31, 1999, 2000 and 2001 respectively, for
legal services rendered by a firm at which a director of the Company was one of
the partners until May 2001. Accounts payable includes $93,000 and $48,000 at
December 31, 2000 and 2001, respectively, due to such firm.
In 2001, the Company paid $90,000 in consulting fees to a member of its
Board of Directors.
(NOTE K) -- Extraordinary Gain and Gain on Settlement of Debt:
For the year ended December 31, 1999 the extraordinary gain of $432,000 is
attributable to the gain on extinguishment of amounts owed to a supplier by the
transfer of title to equipment that had previously been charged to research and
development expenses. For the year ended December 31, 2001, the gain on
settlement of debt of $91,000 is attributable to the cumulative forgiveness of
portions of certain outstanding trade obligations settled during the year.
(NOTE L) -- Quarterly Results (Unaudited):
Quarter Ended
---------------------------------------------------
March 31 June 30 September 30 December 31
---------- ---------- ------------ -----------
2001
Revenues $ 8,000 $ 9,000 $ 9,000 $ 9,000
Net income (loss) (328,000) (322,000) (109,000) 31,000
Income (loss) per share -
basic and diluted (a) (0.03) (0.04) (0.01) 0.00
2000
Revenues $ 19,000 $ 62,000 $ 9,000 $ 11,000
Net income (loss) (305,000) (290,000) (141,000) 216,000
Income (loss) per share -
basic and diluted (a) (0.03) (0.03) (0.01) 0.02
F-15
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(NOTE L) -- Quarterly Results (Unaudited): (Continued)
(a) Per common share amounts for the quarters and full year have been
calculated separately. Accordingly, quarterly amounts do not
necessarily add to the annual amount because of differences in the
weighted average common shares outstanding during each period due to
the effect of the Company's issuing shares of its common stock
during the year.
(NOTE M) -- Subsequent Events:
[1] Series B Convertible Preferred Stock financing:
In March 2002, the Company closed a $1.2 million private placement
("Series B Offering") with a consortium of European investors. The Series B
Offering involved the issuance of one million Units at $1.20 per Unit. Each Unit
consists of one share of Series B Preferred Stock convertible into ten shares of
Common Stock; one warrant entitling the holder to purchase, until June 30, 2002,
up to ten shares of Common Stock at $0.12 per share; and one two-year warrant
entitling the holder to purchase ten shares of Common Stock at $0.24 per share.
The Series B Preferred stockholders are entitled to vote with the common
stockholders on an as converted basis, and the Preferred Stock automatically
converts into Common Stock on March 21, 2003. The Company received gross
proceeds of $760,000 (subject to the escrow referred to below) and effected the
conversion of $440,000 in advances received by the Company during the second
half of 2001 in the form of non-interest bearing convertible promissory notes.
The notes and 3,667,000 warrants issued therewith were cancelled upon conversion
into 367,000 Units.
The Company does not presently have sufficient number of shares of
authorized Common Stock available for issuance upon conversion of the Preferred
Stock and the exercise of the warrants comprising the Units. Accordingly, the
Company intends to seek stockholder approval at its 2002 Annual Meeting of a
proposal to increase the authorized Common Stock to 100,000,000 shares from
43,750,000 shares. Pending implementation of this increase, $300,000 of the
proceeds of the Series B Offering is being held in escrow and is to be released
to the investors if the increase is not implemented within one year from
closing. Warrant holders could also require the Company to redeem their warrants
based on the then market price of the Common Stock if sufficient shares are not
available for issuance upon exercise. Investors were granted certain
registration rights for the securities purchased. A placement fee consisting of
91,667 Units and a two-year warrant to purchase an additional 916,667 shares of
Common Stock at $0.24 per share was paid to an agent in connection with the
private placement.
Options to purchase 5,200,000 shares of Common Stock, including 1,500,000
to an officer and 3,000,000 to a director, pursuant to the 2001 plan were
granted in conjunction with the closing of the Series B Offering. The options
vest in one third increments as of the grant date and the first and second
anniversaries thereof and will expire no later than seven years from the vesting
dates. The exercise price for the options is $0.12 per share which is equivalent
to the conversion price of the Series B Preferred Stock in the Series B
Offering.
Pursuant to the settlement with Dimotech, Ltd., the Company agreed to
issue 21,000 Units under the terms of the Series B Offering as consideration for
$25,000 of accrued royalties.
[2] Other:
In February 2002, the Company reached a settlement with Polymer Technology
Group, Inc. ("PTG"). The terms of the settlement require the Company to pay
$75,000 with five days of the closing of the Series B Offering or by March 31,
2002, whichever occurs sooner, issue 192,000 shares of Common Stock, and issue a
five-year 5% Convertible Note in the principal
F-16
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
amount of $70,000 which is convertible into Common Stock at $1.00 per share. In
exchange, PTG forgives $97,000 of the total $317,000 claimed to be owed by the
Company as of the settlement date which was included in accounts payable at
December 31, 2001.
F-17