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 SEPTEMBER 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 - 16,739,316 SHARES OUTSTANDING AT OCTOBER 30,
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 nine month periods ended September 30, 2001 and 2002
Condensed Balance Sheets as of December 31, 2001 and 4
September 30, 2002 (unaudited)
Condensed Statements of Cash Flows (unaudited) for the 5
nine month period ended September 30, 2001 and 2002
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis or Plan of Operation 7
Item 3. Controls and Procedures 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
Signature 11
Certification 12
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except (In thousands, except
per share data) per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2002 2001 2002
-------- -------- -------- --------
Revenue
Royalties 9 10 26 26
-------- -------- -------- --------
Revenue 9 10 26 26
Operating expenses:
Research and development 36 51 376 174
General and administrative 92 137 511 441
-------- -------- -------- --------
Operating expenses 128 188 887 615
-------- -------- -------- --------
(Loss) from operations (119) (178) (861) (589)
Other income/(expense):
Interest income 2 2 14 4
Interest expense (1) (1) (1) (96)
Gain on settlement of debt 9 89 100
-------- -------- -------- --------
Other income/(expense) 10 1 102 8
Net (loss) (109) (177) (759) (581)
Deemed dividend on convertible preferred stock (135) (284)
-------- -------- -------- --------
Net loss to common stockholders $(109) $(312) $(759) $(865)
======== ======== ======== ========
Net (loss) per share - basic and diluted $(0.01) $(0.02) $(0.06) $(0.05)
======== ======== ======== ========
Weighted average shares outstanding 15,343 16,134 12,303 15,914
3
LIFE MEDICAL SCIENCES, INC.
------------------------------
BALANCE SHEETS
--------------
(In thousands, except per share data)
DECEMBER 31, SEPTEMBER 30,
------------ ---------
2001 2002
------------ ---------
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 372 $ 435
Deferred financing costs 64
Prepaid expenses and advances 11 37
------------ ---------
Total current assets 447 472
Furniture and equipment, less accumulated depreciation 2 1
------------ ---------
TOTAL $ 449 $ 473
============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 901 $ 526
Accrued expenses 164 74
Other liabilities 76 42
Convertible promissory notes, net of discount 348
------------ ---------
Total current liabilities 1,489 642
Deferred royalty income 261 235
Notes payable-long term 40 110
------------ ---------
Total liabilities 1,790 987
------------ ---------
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 - 100,000,
issued and outstanding-15,343 and 16,739 15 17
Additional paid-in capital 36,280 37,675
Accumulated deficit (37,636) (38,217)
------------ ---------
Total stockholders' equity (1,341) (514)
------------ ---------
TOTAL $ 449 $ 473
============ =========
4
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands, except for per share data)
NINE MONTHS ENDED
-----------------
SEPTEMBER 30,
-------------
2001 2002
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(759) $(581)
Adjustments to reconcile net (loss) to
net cash (used in) operating activities:
Depreciation 5 1
Amortization of discount on convertible promissory notes 92
Deferred royalty income (26) (26)
Gain on settlement of debt (79) (100)
Gain on termination of capital lease (10)
Changes in operating assets and liabilities:
(Increase)/decrease in prepaid expenses 95 (26)
(Decrease) in accounts payable and accrued expenses (120) (129)
(Decrease)/Increase in other liabilities (63) (9)
------ ------
Net cash (used in) operating activities (957) (778)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of equipment (1)
Payments on capitalized lease (4)
Proceeds from issuance of notes payable 160
Advances on equity investment 200
Proceeds from issuance of Series B Convertible Preferred Stock 700
Proceeds from exercise of stock options and warrants 141
------ ------
Net cash provided by financing activities 355 841
------ ------
Net Increase/(decrease) in cash and cash equivalents (602) 63
Cash and cash equivalents at beginning of period 844 372
------ ------
Cash and cash equivalents at end of period $ 242 $ 435
====== ======
Non-cash investing and financing activities:
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
Conversion of other liability to note payable 40
Options issued as consideration for accrued consulting fees $ 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
5
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.
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 adhesion barrier film in neonatal patients
undergoing staged open-heart surgical procedures. The Company completed the
patient enrollment phase of this trial in July 2002 and anticipates completion
of the trial and submission of the results to the FDA during the first half of
2003.
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 nine months ended September 30, 2002 of
$10,000 and $26,000, 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 $26,000 for the three months and nine months ended
September 30, 2001, respectively.
The Company incurred research and development expenses of $51,000 and
$174,000 for the three months and nine months ended September 30, 2002,
respectively, compared to $36,000 and $376,000 for the comparable prior year
periods. The reduction in year-to-date expenditures compared to the prior year
is primarily attributable to higher manufacturing expenditures incurred during
the first half of 2001 for the REPEL-CV adhesion barrier film in preparation for
a clinical trial.
General and administrative expenses totaled $137,000 and $441,000 for the
three months and nine months ended September 30, 2002, compared to $92,000 and
$511,000 for the comparable prior year periods. The increase in the three month
expenditures compared to the prior year period is primarily attributable to
insurance and legal fees; whereas, the reduction in year-to-date expenditures
compared to the prior year is primarily attributable to payroll-related
expenses.
Interest income was $2,000 and $4,000 for the three months and nine months
ended September 30, 2002, compared to $2,000 and $14,000 for the comparable
prior year periods. The reduction in year-to-date interest income compared to
the prior year is primarily attributable to lower cash balances.
Interest expense was $1,000 and $96,000 for the three months and nine
months ended September 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. Interest expense was $1,000
for each of the comparable prior year periods.
During the nine months ended September 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 $9,000 and $89,000 were realized during the
three months and nine months ended September 30, 2001, respectively.
The Company's net loss was $177,000 and $581,000 for the three months and
nine months ended September 30, 2002, respectively, compared to $109,000 and
$759,000 for the comparable prior year periods. The changes in net loss compared
to prior year are primarily attributable to the variations in 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 $284,000 for the three months and nine months
ended September 30, 2002, respectively, resulting in a net loss to common
shareholders of $312,000 and $865,000, 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 $435,000 and $372,000 at September 30, 2002 and December
31, 2001, respectively. At September 30, 2002, the Company had a working
capital deficit of $170,000. The cash balance as of September 30, 2002 may not
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.
ITEM 3. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
(a) 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-14(c) and 15-d-14(c)) as of a
date (the "Evaluation Date") within 90 days before the filing date of this
quarterly report, has concluded that as of the Evaluation Date, our disclosure
controls and procedures were adequate and designed to ensure that material
information relating to us and required to be disclosed in the reports we file
or submit to the Securities and Exchange Commission would be made known to him.
(b) Changes in internal controls. There were no significant changes in our
internal controls or to our knowledge, in other factors that could significantly
affect our disclosure controls and procedures subsequent to the Evaluation Date.
9
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of Principal Executive Officer and Principal
Financial Officer Pursuant to U.S.C. 1350.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
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: October 30, 2002 /S/ ROBERT P. HICKEY
------------------------
ROBERT P. HICKEY
CHAIRMAN, PRESIDENT, CEO AND CFO
11
CERTIFICATION
I, Robert P. Hickey, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Life Medical
Sciences, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: October 30, 2002
By:/s/ Robert P. Hickey
--------------------
Robert P. Hickey
Chief Executive Officer and Chief Financial
Officer
12