SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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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 March 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission file number: 0-20580
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.)
PO Box 219 Little Silver, New Jersey 07739
(Address of principal executive offices) (Zip Code)
(732) 728-1769
(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 |_|
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 - 10,535,650 shares
outstanding at May 8, 2001
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
LIFE MEDICAL SCIENCES, INC.
INDEX
Page
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Operations (unaudited) for the
three-month periods ended March 31, 2001 and 2002 3
Condensed Balance Sheets as of December 31,2001 and 4
March 31, 2002 (unaudited)
Condensed Statements of Cash Flows (unaudited) for the
three-month periods ended March 31, 2001 and 2002 5
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis or Plan of Operation 7
Part II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 10
Item 6. Exhibits and Reports on Form 8-K 10
Signature 11
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF OPERATIONS
(unaudited)
(In thousands,
except per share data)
Three months ended
March 31,
----------------------
2001 2002
-------- --------
Revenue
Royalties $ 8 $ 6
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Revenue 8 6
Operating expenses:
Research and development 175 78
General and administrative 168 154
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Operating expenses 343 232
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Loss from operations (335) (226)
Other income/(expense):
Interest income 7 1
Interest expense (92)
Gain on settlement of debt 100
-------- --------
Other income/(expense) 7 9
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Net loss (328) (217)
Deemed dividend on convertible preferred stock (14)
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Net loss to common stockholders $ (328) $ (231)
======== ========
Net loss per common share-basic and diluted $ (0.03) $ (0.01)
======== ========
Weighted average shares outstanding 10,343 15,416
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LIFE MEDICAL SCIENCES, INC.
BALANCE SHEETS
(In thousands,
except per share data)
December 31, March 31,
-----------------------
2001 2002
-------- --------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 372 $ 746
Deferred financing costs 64
Prepaid expenses and advances 11
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Total current assets 447 746
Furniture and equipment, less accumulated depreciation 2 1
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TOTAL $ 449 $ 747
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 901 $ 546
Accrued expenses 164 76
Other liabilities 76 42
Convertible promissory notes, net of discount 348
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Total current liabilities 1,489 664
Deferred royalty income 261 255
Notes payable-long term 40 110
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Total liabilities 1,790 1,029
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Stockholders' equity:
Preferred stock, $.01 par value; shares
authorized - 5,000; Series B convertible
shares issued and outstanding-none and 1,112 11
Common stock, $.001 par value; shares
authorized 43,750; issued and outstanding-
15,343 and 15,535 15 15
Additional paid-in capital 36,280 37,545
Accumulated deficit (37,636) (37,853)
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Total stockholders' equity (1,341) (282)
-------- --------
TOTAL $ 449 $ 747
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LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
Three Months ended
------------------
March 31,
------------------
2001 2002
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Cash flows from operating activities:
Net loss (328) (217)
Adjustments to reconcile net (loss) to
net cash (used in) operating activities:
Depreciation 3 1
Amortization of discount on convertible promissory notes 92
Deferred royalty income (8) (6)
Gain on termination of capital lease (10)
Gain on settlement of debt (100)
Changes in operating assets and liabilities:
Decrease in prepaid expenses 49 11
(Decrease) in accounts payable and accrued expenses (14) (107)
Increase/(decrease) in other liabilities (9)
----- -----
Net cash (used in) operating activities (308) (335)
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Cash flows from financing activities:
Purchase of equipment (1)
Proceeds from issuance of Series B Convertible Preferred Stock 709
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Net cash (used in)/provided by financing activities (1) 709
----- -----
Net Increase/(decrease) in cash and cash equivalents (309) 374
Cash and cash equivalents at beginning of period 844 372
----- -----
Cash and cash equivalents at end of period $ 535 $ 746
===== =====
Non-cash investing and financing activities:
Reduction of capital lease and accrued interest in exchange for
equipment with a cost basis of $6 $ 16
Options issued as consideration for accrued consulting fees 39 $ 68
Conversion of accounts payable to common stock 75
Conversion of accounts payable to note payable 70
Conversion of other liability to Series B Units 25
Conversion of convertible promissory notes to Series B Units 440
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LIFE MEDICAL SCIENCES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
A) Basis of Presentation
The accompanying condensed financial statements do not include all of the
information and footnote disclosures normally included in financial
statements prepared in accordance with 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, 2001 included in the Company's annual report on Form
10-K filed with the Securities and Exchange Commission.
B) 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 and the conversion of outstanding shares of preferred
stock since their inclusion would, in the case of a net loss, reduce the
loss per share.
C) Series B Convertible Preferred Stock Financing
On March 21, 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 up to ten shares of Common Stock at $0.24 per share. The Series B
Preferred Stock will automatically convert into common shares on the first
anniversary of the closing. The Company allocated the proceeds between the
Series B Preferred Stock ($524,000) and the detachable warrants based on
the relative fair values. The Company is reflecting a deemed dividend for
the beneficial conversion feature of the Series B Preferred Stock, which
was limited to the proceeds allocated to the Series B Preferred Stock,
over the one-year period through automatic conversion. See Note M to the
financial statements in the Company's Form 10-K for the fiscal year ended
December 31, 2001, for additional information relating to this
transaction.
6
Item 2. Management's Discussion And Analysis or Plan of Operation .
General
Life Medical Sciences, Inc. is a biomaterials company engaged in the
development and commercialization of innovative and cost-effective medical
devices for therapeutic applications. Products under development focus on
preventing or reducing post-operative adhesions subsequent to a broad range of
surgical procedures and are various stages of clinical trials and preclinical
studies. In December 2001, the Company received approval from the US Food and
Drug Administration (FDA) to initiate a feasibility clinical trial to assess the
safety and efficacy of REPEL-CV(TM) adhesion barrier film in neonatal patients
undergoing staged open-heart surgical procedures. The Company initiated this
trial in February 2002. In March 2002, the Company announced the receipt of
$1,500,000 in additional financing through the completion of a $1,200,000
private placement with a consortium of European institutional investors and
approximately $300,000 through the sale of certain New Jersey state net
operating losses. Of the proceeds of the private placement, $300,000 was held in
escrow pending an increase to the Company's authorized shares of Common Stock.
The Company's shareholders approved the Charter Amendment Proposal at the
Company's 2002 Annual Meeting on April 23, 2002, increasing the Company's
authorized Common Shares from 43,750,000 to 100,000,000. The Company intends to
use the proceeds to fund the REPEL-CV clinical trial and initiate additional
development programs based on its proprietary bioresorbable polymer technology.
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. The
Company is currently developing bioresorbable adhesion barrier films for the
prevention or reduction of post-operative surgical adhesions in cardio-vascular
surgery (REPEL-CV), gynecological and general surgical procedures (REPELTM), as
well as in bioresorbable adhesion barrier coatings (viscous solutions) for the
prevention or reduction of post-operative surgical adhesions in gynecological
and general abdominal surgical procedures (RESOLVETM) and orthopedic and spinal
surgical procedures (RELIEVE TM). These products are in various stages of
development.
Certain statements in this Report on Form 10-Q (the "Report") under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" 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 and the
ability of the company to raise capital. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company, or industry results,
to be materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Reference is made to
the Company's Annual Report on Form 10-K for the year ended December 31, 2001,
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 which 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.
7
Results of Operations
Revenue for the three month period ended March 31, 2002 of $6,000 was
attributable to royalty income from product sales of the Sure-Closure
System(TM). This compares to royalty income from the same source of $8,000 for
the three months ended March 31, 2000.
The Company incurred research and development expenses of $78,000 for the
three months ended March 31, 2002, compared to $175,000 for the comparable prior
year period. The reduction in expenditures compared to the prior year is
primarily attributable to higher manufacturing and clinical development
expenditures incurred during 2001 for the REPEL-CV adhesion barrier film.
General and administrative expenses totaled $154,000 for the three months
ended March 31, 2001, compared to $168,000 for the comparable prior year period.
These expenses consisted primarily of management compensation, legal fees, and
other general and administrative costs. The reduction in spending is primarily
attributable to lower payroll-related expenses partially offset by increased
consulting fees.
Interest income was $1,000 for the three months ended March 31, 2002,
compared to $7,000 for the comparable prior year period reflecting lower cash
balances.
Interest expense was $92,000 for the three months ended March 31, 2002,
reflecting the write-off of the remaining balance of the debt discount upon the
conversion of the convertible promissory notes into Series B Units. There was no
interest expense for the prior year period.
During the three months ended March 31, 2002, the Company recorded a gain
on settlement of debt of $100,000 associated with the write-off of certain trade
payables; there were no similar transactions during the comparable prior year
period.
The Company's net loss was $217,000 for the three months ended March 31,
2002. A net loss of $328,000 was recorded for the comparable prior year period.
The Company expects to incur losses in future periods.
The Company reflected a deemed non-cash dividend on preferred stock of
$14,000 for the three months ended March 31, 2002, resulting in a net loss to
common shareholders of $231,000. The amount of the deemed dividend was prorated
to reflect the fact that the preferred stock was issued at the end of the most
recent quarter on March 21, 2002. Deemed non-cash dividends will be reflected in
future quarters through automatic conversion of the preferred stock in March
2003, resulting in an aggregate deemed dividend over such period of $524,000.
8
Liquidity and Capital Resources
The cash balances were $746,000 and $372,000 at March 31, 2002 and
December 31, 2001, respectively. $300,000 of the Company's March 31, 2002 cash
balance was held in escrow pending the Company obtaining shareholder approval of
an increase in its authorized common shares. This approval was obtained at the
Company's Annual Meeting of Shareholders on April 23, 2002 and the funds were
subsequently released to Company.
At March 31, 2002, the Company had a working capital surplus of $82,000.
The cash balance as of March 31, 2002 is expected to be sufficient to meet the
Company's cash requirements for operating activities through the remainder of
2002. In any event, the Company will be required to raise substantial additional
funds in the beginning of 2003 to continue the pre-clinical and clinical
development of its proposed products. The Company presently has no arrangements
for such financing and cannot assure investors that such arrangements or
financings will be available as needed or on terms acceptable to the Company.
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PART II - OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds
Effective during the first quarter of 2002, the Company granted, under its
2001 Non-Qualified Stock Option Plan, options to purchase up to 5,568,000
shares of Common Stock. Of these, as previously reported, options to
purchase a total of up to 5,200,000 shares were granted to the Chairman, a
director and a scientific consultant during 2002, effective upon the
consummation of a private placement which was completed on March 21, 2002.
In addition, options to purchase up to 300,000 shares were granted to a
scientific consultant in consideration for the initiation of a new
development program and the cancellation of previously outstanding options
and options to purchase up to 68,000 shares were granted in consideration
for the waiver of outstanding clinical consulting fees of $68,000. The
exercise prices for these options range from $0.12 to $0.26 per share,
vest over a period of up to 3 years and expire 7 years from the vesting
date. The Company relied upon Section 4(2) of the Securities Act for these
grants.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 2002.
10
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.
Life Medical Sciences, Inc.
(Registrant)
Date: May 9, 2002 /s/ Robert P. Hickey
--------------------------------
Robert P. Hickey
Chairman, President, CEO and CFO
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