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, 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 - 41,482,910 shares outstanding at August
12, 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 six-month 3
periods ended June 30, 2002 and 2003
Condensed Balance Sheets as of December 31, 2002 and 4
June 30, 2003 (unaudited)
Condensed Statements of Cash Flows (unaudited) for the 5
six-month periods ended June 30, 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
2
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,
2002 2003 2002 2003
-------- -------- -------- --------
Revenue
Royalties 10 5 16 13
-------- -------- -------- --------
Revenue 10 5 16 13
Operating expenses:
Research and development 45 190 123 421
General and administrative 150 563 304 925
-------- -------- -------- --------
Operating expenses 195 753 427 1,346
-------- -------- -------- --------
(Loss) from operations (185) (748) (411) (1,333)
Other income/(expense):
Interest income 1 2 1
Interest expense (3) (1) (95) (3)
Gain on settlement of debt 100 9
-------- -------- -------- --------
Other income/(expense) (2) (1) 7 7
Net (loss) (187) (749) (404) (1,326)
Deemed dividend on convertible preferred stock (135) (73) (149) (178)
-------- -------- -------- --------
Net loss to common stockholders $ (322) $ (822) $ (553) $ (1,504)
======== ======== ======== ========
Net (loss) per share - basic and diluted $ (0.02) $ (0.02) $ (0.04) $ (0.06)
======== ======== ======== ========
Weighted average shares outstanding 15,576 34,883 15,497 27,090
3
LIFE MEDICAL SCIENCES, INC.
BALANCE SHEETS
(In thousands, except per share data)
December 31, June 30,
-----------------------
2002 2003
-------- --------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 497 $ 1,025
Other receivables 39
Prepaid expenses and advances 17 98
-------- --------
Total current assets 514 1,162
Acquired technology, less accumulated amortization 327
Furniture and equipment, less accumulated depreciation 4
-------- --------
TOTAL $ 514 $ 1,493
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 584 $ 530
Accrued expenses 77 74
Other liabilities 146 333
-------- --------
Total current liabilities 807 937
Deferred royalty income 227 214
Notes payable-long term 110 110
-------- --------
Total liabilities 1,144 1,261
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value; shares authorized - 5,000;
Series 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 41,478 17 41
Additional paid-in capital 38,140 40,248
Unearned stock-based compensation (114) (54)
Accumulated deficit (38,684) (40,009)
-------- --------
Total stockholders' equity (630) 232
-------- --------
TOTAL $ 514 $ 1,493
======== ========
4
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands, except for per share data)
Six months ended
----------------------------------------
June 30,
----------------------------------------
2002 2003
------------------ --------------------
Cash flows from operating activities:
Net loss $ (404) $ (1,326)
Adjustments to reconcile net (loss) to
net cash (used in) operating activities:
Depreciation 1
Amortization of acquired technology 17
Stock based compensation 538
Amortization of discount on convertible promissory notes 92
Deferred royalty income (16) (13)
Gain on settlement of debt (100) (9)
Changes in operating assets and liabilities:
(Increase) in prepaid expenses (48) (81)
(Increase) in Other receivables (87) (39)
(Decrease) in accounts payable and accrued expenses (134) (48)
(Decrease)/Increase in other liabilities (9) (4)
------------------ --------------------
Net cash (used in) operating activities (705) (965)
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Cash flows from investing activities:
Purchase of equipment (4)
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Net cash (used in) investing activities (4)
------------------ --------------------
Cash flows from financing activities:
Proceeds from issuance of convertible preferred stock 700 653
Proceeds from exercise of stock options and warrants 138 844
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Net cash provided by financing activities 838 1,497
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Net Increase/(decrease) in cash and cash equivalents 133 528
Cash and cash equivalents at beginning of period 372 497
------------------ --------------------
Cash and cash equivalents at end of period $ 505 $ 1,025
================== ====================
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 notes 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 June 30, Six Months ended June 30,
--------------------------- -------------------------
2002 2003 2002 2003
---- ---- ---- ----
Reported net loss attributable to common stockholders ($322) ($822) ($553) ($1,504)
Stock-based employee compensation expense
included in reported net loss 48 18 180 70
Stock-based employee compensation determined under
the fair value based method (57) (53) (214) (114)
---------------------------------- ------------------------------
Pro forma net loss attributable to common stockholders ($331) ($857) ($587) ($1,548)
================================== ==============================
Loss per common share attributable to common stockholders
(basic and diluted):
As reported ($0.02) ($0.02) ($0.04) ($0.06)
================================== ==============================
Pro forma ($0.02) ($0.02) ($0.04) ($0.06)
================================== ==============================
6
C) Exercise of Warrants
During June 2003, the Company received proceeds of $796,000
from the exercise of warrants to purchase 6,634,000 shares of the
Company's common stock. Of the proceeds, $39,000 was reported as other
receivables on June 30, 2003, which amount was subsequently received.
D) 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.
7
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 in 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. In April 2003, the Company
announced that it successfully completed the feasibility clinical trial and that
the trial results and a proposed multi-center, randomized pivotal clinical trial
protocol were submitted to the FDA. In June 2003, the Company announced that it
received approval from the FDA to conduct the pivotal clinical trial. The
Company plans to conduct this trial as a basis for obtaining FDA approval to
market REPEL-CV. In July 2003, the Company announced the receipt of
approximately $800,000 in additional financing through the exercise of warrants
to purchase the Company's common shares. The Company intends to use the proceeds
to support the funding of the REPEL-CV pivotal clinical trial.
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 and six month periods ended June 30, 2003 of $5,000
and $13,000, respectively, was attributable to royalty income from product sales
of the Sure-Closure System(TM). These revenue figures compare to royalty income
from the same source of $10,000 and $16,000 for the three month and six month
periods ended June 30, 2002.
The Company incurred research and development expenses of $190,000 and
$421,000 for the three months and six months ended June 30, 2003, respectively,
compared to $45,000 and $123,000 for the comparable prior year periods. The
increase in expenditures compared to the prior year is primarily attributable to
higher manufacturing and clinical development
8
Results of Operations (Continued)
expenditures incurred during 2003 in preparation for the REPEL-CV pivotal
clinical trial. It is anticipated that these expenses will continue at the
higher levels throughout the clinical trial.
General and administrative expenses totaled $563,000 and $925,000 for
the three months and six months ended June 30, 2003, respectively, compared to
$150,000 and $304,000 for the comparable prior year periods. These expenses
consisted primarily of management compensation including stock-based
compensation, insurance, legal fees, and other general and administrative costs.
The increase in spending is primarily attributable to stock-based compensation
expense of $334,000 and $510,000 for the three months and six months ended June
30, 2003, respectively.
Interest income was $1,000 for the six months ended June 30, 2003, as
compared to $1,000 and $2,000 recorded in the three months and six months ended
June 30, 2002, respectively.
Interest expense was $1,000 and $3,000 for the three months and six
months ended June 30, 2003, respectively, compared to $3,000 and $95,000 for the
comparable prior year periods. 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 six months ended June 30, 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 $749,000 and $1,326,000 for the three months
and six months ended June 30, 2003, respectively, compared to $187,000 and
$404,000 for the comparable prior year periods. The Company expects to incur
losses at comparable levels in future periods.
The Company reflected a deemed non-cash dividend on preferred stock of
$73,000 and $178,000 for the six months ended June 30, 2003, respectively,
resulting in a net loss to common shareholders of $822,000 and $1,504,000. The
deemed non-cash dividend was $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.
Liquidity and Capital Resources
The cash balances were $1,025,000 and $497,000 at June 30, 2003 and
December 31, 2002, respectively. At June 30, 2003, the Company had a working
capital surplus of $225,000. The cash balance as of June 30, 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.
9
PART II - OTHER INFORMATION
ITEM 2. Changes in Securities
During June 2003, holders of outstanding common stock purchase warrants
expiring June 30, 2003, exercised all of such warrants resulting in the issuance
of an aggregate of 6,634,000 shares of the Company's common stock for aggregate
cash consideration of approximately $796,000, or $0.12 per share. The warrants
were previously issued as part of the Company's Series C Convertible Preferred
Stock private placement. The offering was made in reliance upon the provisions
of Section 4(2) under the Securities Act of 1933. The offering was made to a
limited number of investors, each of whom made investment representations and
are believed to be sophisticated investors.
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 the
period covered by this quarterly report, has concluded that as of the such 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. In connection with the evaluation
referred to in (a) above, we have identified no change in our internal control
of financial reporting that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Principal Executive Officer and
Principal Financial Officer Pursuant to Exchange Act Rule
13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer and
Principal Financial Officer Pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 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: August 12, 2003
/s/ Robert P. Hickey
-------------------------------
Robert P. Hickey
President, CEO and CFO
11
EXHIBIT INDEX
ITEM PAGE
- ---- ----
31.1 Certification of Principal Executive Officer and Principal Financial 12
Officer Pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer and Principal Financial 13
Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes- Oxley Act of 2002.