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, 2003
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 - 34,804,877 SHARES OUTSTANDING AT MAY 1, 2003
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
periods ended March 31, 2002 and 2003
Condensed Balance Sheets as of December 31,2002 and 4
March 31, 2003 (unaudited)
Condensed Statements of Cash Flows (unaudited) for the 5
three-month periods ended March 31, 2002 and 2003
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis or Plan of Operation 8
Item 3. Controls and Procedures 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
Signature 11
Certification 12
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,
------------------------------------
2002 2003
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Revenue
Royalties $ 6 $ 8
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Revenue 6 8
Operating expenses:
Research and development 78 231
General and administrative 154 362
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Operating expenses 232 593
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Loss from operations (226) (585)
Other income/(expense):
Interest income 1 1
Interest expense (92) (2)
Gain on settlement of debt 100 9
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Other income/(expense) 9 8
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Net loss (217) (577)
Deemed dividend on convertible preferred stock (14) (105)
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Net loss to common stockholders $ (231) (682)
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Net loss per common share-basic and diluted $ (0.01) (0.04)
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Weighted average shares outstanding 15,416 19,210
3
LIFE MEDICAL SCIENCES, INC.
BALANCE SHEETS
(In thousands, except per share data)
DECEMBER 31, MARCH 31,
------------------------------------------
2002 2003
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ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 497 $ 618
Prepaid expenses and advances 17 132
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Total current assets 514 750
Acquired technology 344
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TOTAL $ 514 $ 1,094
==================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 584 $ 555
Accrued expenses 77 71
Other liabilities 146 195
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Total current liabilities 807 821
Deferred royalty income 227 219
Notes payable-long term 110 110
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Total liabilities 1,144 1,150
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STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; shares authorized - 5,000;
Seried B convertible shares issued and outstanding - 1,113 and none 11
Series C convertible shares issued and outstanding - none and 572 6
Common stock, $.001 par value; shares authorized - 100,000
issued and outstanding - 16,759 and 34,805 17 35
Additional paid-in capital 38,140 39,238
Unearned stock-based compensation (114) (74)
Accumulated deficit (38,684) (39,261)
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Total stockholders' equity (630) (56)
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TOTAL $ 514 1,094
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4
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED
---------------------------------------
MARCH 31,
---------------------------------------
2002 2003
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Cash flows from operating activities:
Net loss $ (217) $ (577)
Adjustments to reconcile net (loss) to
net cash (used in) operating activities:
Depreciation 1
Stock based compensation 204
Amortization of discount on convertible promissory notes 92
Deferred royalty income (6) (8)
Gain on settlement of debt (100) (9)
Changes in operating assets and liabilities:
Decrease/(increase) in prepaid expenses 11 (115)
(Decrease) in accounts payable and accrued expenses (107) (26)
Increase/(decrease) in other liabilities (9) (3)
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Net cash (used in) operating activities (335) (534)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issurance of convertible preferred stock 709 653
Proceeds from the exercise of stock options 2
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Net cash provided from financing activities 709 655
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Net Increase/(decrease) in cash and cash equivalents 374 121
Cash and cash equivalents at beginning of period 372 497
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Cash and cash equivalents at end of period $ 746 $ 618
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Non-cash investing and financing activities:
Options issued as consideration for accrued consulting fees $ 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
Common stock and options issued in conjunction with the acquisition of technology $ 344
Conversion of Series B preferred stock into common stock 11
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, 2002 included in the Company's annual report on Form 10-KSB filed
with the Securities and Exchange Commission.
B) 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 and SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure," which was released in
December 2002 as an amendment of SFAS No. 123.
The following table illustrates the effect on net loss and
loss per share if the fair value based method had been applied to all
awards (in thousands, except per share data):
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2003
---- ----
Reported net loss attributable to common stockholders $ (231) $ (682)
Stock-based employee compensation expense
included in reported net loss 132 50
Stock-based employee compensation determined under
the fair value based method (158) (60)
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Pro forma net loss attributable to common stockholders $ (257) $ (692)
================= ===============
Loss per common share attributable to common stockholders
(basic and diluted):
As reported $ (0.01) $ (0.04)
================= ===============
Pro forma $ (0.02) $ (0.04)
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C) 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.
D) SERIES C CONVERTIBLE PREFERRED STOCK FINANCING
On April 1, 2003, the Company completed a $725,000 private
placement ("Series C Financing") with a consortium of European
investors. The Series C Financing involved the issuance of 604,000
Units at $1.20 per Unit. Each Unit consists of one share of Series C
Convertible Preferred Stock ("Series C Preferred Stock") convertible
into ten shares of Common Stock; one warrant entitling the holder to
purchase, until June 30, 2003, 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 $0.12 per share. 571,600
Units closed on March 26, 2003 and the remainder on April 1, 2003. The
Series C Preferred Stock will automatically convert into common shares
on the first anniversary of the initial closing. The Company allocated
the proceeds between the Series C Preferred Stock ($293,000) 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 C Preferred Stock, which was limited to the proceeds
allocated to the Series C Preferred Stock, over the one-year period
through automatic conversion. See Note L to the financial statements in
the Company's Form 10-KSB for the fiscal year ended December 31, 2002,
for additional information relating to this transaction.
E) PHAIRSON TECHNOLOGY ACQUISITION
In March 2003, the Company completed the purchase of the
polymer technology assets of a private medical technology company based
in the United Kingdom, Phairson Medical Limited (and an affiliated
entity; collectively, "Phairson"), in exchange for the issuance of
6,895,561 shares of restricted common stock of the Company. The assets
comprise a series of United States and foreign patent applications as
well as scientific and clinical documentation. The Company also assumed
Phairson's rights and obligations under a development agreement with
the Swiss Federal Institute of Technology and the University of Zurich,
as well as with the principal investigator of the technology
development project, Professor JA Hubbell. Under these agreements, the
Company is required to pay royalties of no more than 1.1% of net sales
of products incorporating the technology. If the Company fails to
pursue development efforts involving the technology for an extended
period of time, the Company is obligated to negotiate a return of the
technology to the university. Certain stockholders of Phairson have
participated in the Series C Financing as well as prior financings of
the Company, and Richard Franklin, a director of the Company, is a
stockholder and serves as CEO of Phairson. In connection with the
acquisition, the Company granted an option, exercisable for seven
years, to purchase up to 100,000 shares of common stock at $.09 per
share to Dr. Gere S. diZerega, who has served as a medical consultant
to both companies and who assisted in identifying the acquisition
opportunity. In connection with this transaction, $344,000 was recorded
as acquired technology which is being amortized over the estimated life
of 5 years.
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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(TM) adhesion barrier film in neonatal patients
undergoing staged open-heart surgical procedures. The Company initiated this
trial in February 2002 and completed patient enrollment in September 2002. In
April 2003, the Company announced that it successfully completed the feasibility
clinical trial and that the trial results and a proposed multi-center pivotal
clinical trial protocol have been submitted to the FDA. The Company plans to
conduct this multi-center pivotal clinical trial as a basis for obtaining FDA
approval to market REPEL-CV. In April 2003, the Company announced the receipt of
approximately $725,000 in additional financing through the completion of a
private placement with a consortium of European institutional investors. 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 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-KSB for the year ended December 31, 2002, 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.
RESULTS OF OPERATIONS
Revenue for the three month period ended March 31, 2003 of $8,000 was
attributable to royalty income from product sales of the Sure-Closure
System(TM). This compares to royalty income from the same source of $6,000 for
the three months ended March 31, 2002.
The Company incurred research and development expenses of $231,000 for
the three months ended March 31, 2003, compared to $78,000 for the comparable
prior year period. The increase in expenditures compared to the prior year is
primarily attributable to higher manufacturing and clinical development
expenditures incurred during 2003 for the REPEL-CV adhesion barrier film.
8
RESULTS OF OPERATIONS (CONTINUED)
General and administrative expenses totaled $362,000 for the three
months ended March 31, 2003, compared to $154,000 for the comparable prior year
period. These expenses consisted primarily of management compensation including
stock-based compensation, legal fees, and other general and administrative
costs. The increase in spending is primarily attributable to stock-based
compensation expense of $176,000 and higher payroll-related costs.
Interest income was $1,000 for the three months ended March 31, 2003
which was equal to the amount recorded in the prior year period.
Interest expense was $2,000 for the three months ended March 31, 2003,
compared to $92,000 for the comparable prior year period. The reduction is
primarily attributable to the write-off, in 2002, of the remaining balance of
the debt discount upon the conversion of convertible promissory notes into
Series B Units.
During the three months ended March 31, 2003, the Company recorded a
gain on settlement of debt of $9,000, compared to $100,000 for the comparable
prior year period. The gains in both periods are associated with the settlement
of trade payables.
The Company's net loss was $577,000 for the three months ended March
31, 2003. A net loss of $217,000 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
$105,000 for the three months ended March 31, 2003, resulting in a net loss to
common shareholders of $682,000. The deemed non-cash dividend was $14,000 for
the three months ended March 31, 2002, resulting in a net loss to common
shareholders of $231,000.
LIQUIDITY AND CAPITAL RESOURCES
The cash balances were $618,000 and $497,000 at March 31, 2003 and
December 31, 2002, respectively. On March 26, 2003 and April 1, 2003, the
Company completed a $725,000 private placement ("Series C Financing") with a
consortium of European investors. (See Note D) $39,000 of the proceeds from the
Series C Financing was not included in the cash balance at March 31, 2003. At
March 31, 2003, the Company had a working capital deficit of $71,000. The cash
balance as of March 31, 2003 is not sufficient to meet the Company's cash
requirements for operating activities through the remainder of 2003. The Company
will be required to raise substantial additional funds in both the short and
long term 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.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Company was held on
April 23, 2003.
(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 ratify the appointment of Eisner LLP, as the
independent auditors of the Company was 20,986,132 for,
158,460 against with no abstentions.
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 March 31,
2003.
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 8, 2003
/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: May 8, 2003 By: /s/ Robert P. Hickey
-------------------
Robert P. Hickey
Chief Executive Officer and
Chief Financial Officer
12