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 June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-20580
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 - 16,699,316 shares outstanding at July 11, 2002
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 3
and six month periods ended June 30, 2001 and 2002
Condensed Balance Sheets as of December 31,2001 and 4
June 30, 2002 (unaudited)
Condensed Statements of Cash Flows (unaudited) for the 5
six month period ended June 30, 2001 and 2002
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 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 10
Signature 11
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data) (In thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2002 2001 2002
------------ -------------- -------------- -------------
Revenue
Product sales $ $ $ $
Royalties 9 10 17 16
------------ -------------- -------------- -------------
Revenue 9 10 17 16
Operating expenses:
Research and development 165 45 340 123
General and administrative 241 150 419 304
------------ -------------- -------------- -------------
Operating expenses 406 195 759 427
------------ -------------- -------------- -------------
(Loss) from operations (397) (185) (742) (411)
Other income/(expense):
Interest income 5 1 12 2
Interest expense (3) (95)
Gain on settlement of debt 70 80 100
------------ -------------- -------------- -------------
Other income/(expense) 75 (2) 92 7
Net (loss) (322) (187) (650) (404)
Deemed dividend on convertible preferred stock (135) (149)
------------ -------------- -------------- -------------
Net loss to common stockholders $ (322) $ (322) $ (650) $ (553)
============ ============== ============== =============
Net (loss) per share - basic and diluted $ (0.03) $ (0.02) $ (0.06) $ (0.04)
============ ============== ============== =============
Weighted average shares outstanding 11,168 15,576 10,755 15,497
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LIFE MEDICAL SCIENCES, INC.
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BALANCE SHEETS
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(In thousands, except per share data)
DECEMBER 31, JUNE 30,
----------------------------
2001 2002
----------- -------------
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 372 $ 505
Other receivables 87
Deferred financing costs 64
Prepaid expenses and advances 11 59
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Total current assets 447 651
Furniture and equipment, less accumulated depreciation 2 1
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TOTAL $ 449 $ 652
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 901 $ 521
Accrued expenses 164 74
Other liabilities 76 42
Convertible promissory notes, net of discount 348
---------- ----------
Total current liabilities 1,489 637
Deferred royalty income 261 245
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Notes payable-long term 40 110
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Total liabilities 1,790 992
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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 16,699 15 17
Additional paid-in capital 36,280 37,672
Accumulated deficit (37,636) (38,040)
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Total stockholders' equity (1,341) (340)
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TOTAL $ 449 $ 652
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LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED
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JUNE 30,
-----------------------
2001 2002
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (650) $ (404)
Adjustments to reconcile net (loss) to
net cash (used in) operating activities:
Depreciation 4 1
Amortization of discount on convertible promissory notes 92
Deferred royalty income (17) (16)
Gain on settlement of debt (100)
Gain on termination of capital lease (10)
Changes in operating assets and liabilities:
(Increase)/decrease in prepaid expenses 97 (48)
(Increase) in Other receivables (87)
(Decrease) in accounts payable and accrued expenses (159) (134)
(Decrease)/Increase in other liabilities 143 (9)
----------- ----------
Net cash (used in) operating activities (592) (705)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of equipment (1)
Proceeds from issuance of Series B Convertible Preferred Stock 700
Proceeds from exercise of stock options and warrants 138
Net cash provided by financing activities (1) 838
----------- ----------
Net Increase/(decrease) in cash and cash equivalents (593) 133
Cash and cash equivalents at beginning of period 844 372
----------- ----------
Cash and cash equivalents at end of period $ 251 $ 505
=========== ==========
Non-cash investing and financing activities:
Reduction of capital lease and a ccrued 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 notes 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 accounting principles generally
accepted in the United States of America 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. Based on these audited financial statements, the independent
auditors' report expressed substantial doubt about the Company's ability to
continue as a going concern.
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.
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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 adhesion barrier film in neonatal patients
undergoing staged open-heart surgical procedures. The Company initiated this
trial in February 2002 and enrollment is ongoing.
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 under the caption "Management's
Discussion and Analysis or Plan of Operation" 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 months and six months ended June 30, 2002 of $10,000
and $16,000, respectively was attributable to royalty income from product sales
of the Sure-Closure System . This compares to royalty income from the same
source of $9,000 and $17,000 for the three months and six months ended June 30,
2001, respectively.
The Company incurred research and development expenses of $45,000 and
$123,000 for the three months and six months ended June 30, 2002, respectively,
compared to $165,000 and $340,000 for the comparable prior year periods. The
reduction in expenditures compared to the prior year is primarily attributable
to higher manufacturing expenditures incurred during 2001 for the REPEL-CV
adhesion barrier film.
General and administrative expenses totaled $150,000 and $304,000 for the
three months and six months ended June 30, 2002, compared to $241,000 and
$419,000 for the comparable prior year periods. 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 and $2,000 for the three months and six months
ended June 30, 2002, compared to $5,000 and $12,000 for the comparable prior
year periods reflecting lower cash balances and lower interest rates.
Interest expense was $3,000 and $95,000 for the three months and six months
ended June 30, 2002, primarily reflecting the write-off in March of the $92,000
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 six months ended June 30, 2002, the Company recorded a gain on
settlement of debt of $100,000 associated with the write-off of certain trade
payables; similar gains of $70,000 and $80,000 were realized during the three
months and six months ended June 30, 2001, respectively.
The Company's net loss was $187,000 and $404,000 for the three months and
six months ended June 30, 2002, respectively compared to $322,000 and $650,000
for the comparable prior year periods. The reductions in net loss are primarily
attributable to the lower operating expenses referenced above. The Company
expects to incur losses in future periods.
The Company reflected deemed non-cash dividends on preferred stock issued
in March 2002, of $135,000 and $149,000 for the three months and six months
ended June 30, 2002, respectively, resulting in a net loss to common
shareholders of $322,000 and $553,000, respectively. Deemed non-cash dividends
will be reflected on a pro-rata basis in future quarters until 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 $505,000 and $372,000 at June 30, 2002 and December
31, 2001, respectively. At June 30, 2002, the Company had a working capital
surplus of $14,000. The cash balance as of June 30, 2002 is not expected to be
sufficient to meet the Company's cash requirements for operating activities
through the remainder of 2002; however, the Company may receive, during the
second half of 2002, additional funds through the exercise of warrants and sale
of state tax NOL's which could sustain operations into early 2003. The Company
will be required to raise substantial additional funds in 2003 to sustain
operations. The Company presently has no arrangements for such financing and
cannot assure investors that such arrangements will be available as needed or on
terms acceptable to the Company.
As previously reported, in March 2002 the Company completed a $1,200,000
private placement of Series B Preferred Stock and warrants with a consortium of
European institutional investors. 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 full escrowed amount was released to the Company
following an increase in the Company's authorized common stock from 43,750,000
shares to 100,000,000 shares, which action was approved by shareholders at the
2002 Annual Meeting held on April 23, 2002. The Company issued two sets of
warrants in connection with the private placement, each to purchase an aggregate
of 11,125,000 shares of common stock; one set exercisable at an aggregate
purchase price of $1,335,000, or $.12 per share, and expiring June 30, 2002, and
the other set exercisable for an aggregate purchase price of $2,670,000, or $.24
per share, and expiring March 21, 2004. The Company subsequently modified the
terms of the warrants expiring on June 30, 2002, wherein, if a warrantholder
exercised at least 50% of a warrant by June 30, 2002, the expiration date for
the remainder of that warrant would be extended to December 31, 2002. A total of
1,141,666 shares equal to $137,000 were exercised under the revised terms with
an equivalent number available for exercise until December 31, 2002. The
remainder of the shorter term warrants expired as of June 30, 2002.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the second quarter, the Company issued a total of 1,141,666 shares of its
Common Stock in exchange for the exercise of warrants, under the revised terms
previously described, that were issued in conjunction with the Series B
Preferred Stock private placement. Proceeds from these transactions totaled
$137,000 which will be used to fund operations. The Company relied on the
exemption form registration provided by Section 4(2) of the Securities Act of
1933 for these transactions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Company was held on April
23, 2002.
(b) The following five Directors were reelected at the Annual Meeting:
Edward A. Celano Walter R. Maupay, Jr.
Richard L. Franklin, MD Irwin M. Rosenthal
Robert P. Hickey
(c) The vote to approve an amendment to the Company's Restated Certificate
of Incorporation increasing the number of authorized shares of Common
Stock from 43,750,000 to 100,000,000 (the "Charter Amendment
Proposal") was 23,565,165 for, 49,550 against and 1,600 abstain.
(d) The vote to ratify the appointment of Richard A. Eisner & Company,
LLP, as the independent auditors of the Company was 21,763,835 for,
2,900 against and 6,250 abstain.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of Principal Executive Officer and Principal
Financial Officer.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
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: August 8, 2002 /s/ Robert P. Hickey
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Robert P. Hickey
Chairman, President, CEO and CFO
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