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, 2004
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 - 59,950,247 SHARES OUTSTANDING AT APRIL 30, 2004
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, 2003 and 2004
Condensed Balance Sheets as of December 31,2003 and 4
March 31, 2004 (unaudited)
Condensed Statements of Cash Flows (unaudited) for the 5
three-month periods ended March 31, 2003 and 2004
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 10
Certification 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,
--------------------
2003 2004
-------- --------
Revenue
Royalties $ 8 $ 8
-------- --------
Revenue 8 8
Operating expenses:
Research and development 231 338
General and administrative 362 424
-------- --------
Operating expenses 593 762
-------- --------
Loss from operations (585) (754)
Other income/(expense):
Interest income 1 1
Interest expense (2) (2)
Gain on settlement of debt 9
-------- --------
Other income/(expense) 8 (1)
-------- --------
Net loss (577) (755)
Beneficial conversion on convertible preferred stock (105) (74)
-------- --------
Net loss to common stockholders $ (682) (829)
======== ========
Net loss per common share-basic and diluted $ (0.04) (0.02)
======== ========
Weighted average shares outstanding 19,210 43,221
3
LIFE MEDICAL SCIENCES, INC.
BALANCE SHEETS
(In thousands, except per share data)
DECEMBER 31, MARCH 31,
----------------------------
2003 2004
------------ ------------
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 680 $ 2,857
Prepaid expenses and advances 37 201
------------ ------------
Total current assets 717 3,058
Acquired technology, less accumulated amortization 293 276
Furniture and equipment, less accumulated depreciation 4 3
------------ ------------
TOTAL $ 1,014 $ 3,337
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 439 $ 527
Accrued stock-based compensation 250
------------ ------------
Total current liabilities 689 527
Deferred royalty income 197 189
Notes payable-long term 110 110
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Total liabilities 996 826
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STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; shares authorized - 5,000;
Series C convertible shares issued and outstanding - 663 and none 7
Common stock, $.001 par value; shares authorized - 100,000
issued and outstanding - 41,483 and 59,950 41 60
Additional paid-in capital 40,248 43,467
Unearned stock-based compensation (17)
Accumulated deficit (40,261) (41,016)
------------ ------------
Total stockholders' equity 18 2,511
------------ ------------
TOTAL $ 1,014 3,337
============ ============
4
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED
----------------------------
MARCH 31,
----------------------------
2003 2004
------------ ------------
Cash flows from operating activities:
Net loss $ (577) $ (755)
Adjustments to reconcile net (loss) to
net cash (used in) operating activities:
Depreciation 1
Amortization of acquired technology 17
Stock based compensation 204 157
Deferred royalty income (8) (8)
Gain on settlement of debt (9)
Changes in operating assets and liabilities:
Decrease/(increase) in prepaid expenses (115) (164)
Increase/(decrease) in accounts payable and accrued expenses (26) 88
(Decrease) in other liabilities (3)
------------ ------------
Net cash (used in) operating activities (534) (664)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of convertible preferred stock 653
Proceeds from the exercise of warrants 2,841
Proceeds from the exercise of stock options 2
------------ ------------
Net cash provided from financing activities 655 2,841
------------ ------------
Net Increase/(decrease) in cash and cash equivalents 121 2,177
Cash and cash equivalents at beginning of period 497 680
------------ ------------
Cash and cash equivalents at end of period $ 618 $ 2,857
============ ============
Non-cash investing and financing activities:
Common stock and options issued in conjunction with the acquisition of technology $ 344 $
Conversion of Series B preferred stock into common stock 11
Conversion of Series C preferred stock into common stock 7
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, 2003 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."
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,
----------------------------
2003 2004
------------ ------------
Reported net loss attributable to common stockholders $ (682) $ (755)
Stock-based employee compensation expense
included in reported net loss 50 17
Stock-based employee compensation determined under
the fair value based method (60) (25)
------------ ------------
Pro forma net loss attributable to common stockholders $ (692) $ (763)
============ ============
Loss per common share attributable to common stockholders
(basic and diluted):
As reported $ (0.04) $ (0.02)
============ ============
Pro forma $ (0.04) $ (0.02)
============ ============
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
6
Quarter Ended March 31,
2003 2004
------------ ------------
Dividend yield 0% 0%
Expected volatility 104% 103%
Risk free interest rate 3.8% 2.2%
Expected life 2.5 years 2.5 years
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) EXERCISE OF WARRANTS
In March 2004, the Company received proceeds of $2,841,000 from the
exercise of warrants to purchase 11,833,000 shares of the Company's common
stock.
E) REVENUE RECOGNITION POLICY:
Royalty income is based on the quarterly sales of the Sure-Closure
System and any line extensions or embodiments thereof through June 2004.
Royalties are calculated and credited to the Company within forty-five
days after the last day of each quarter. The Company recognizes such
income when the amounts earned become fixed and determinable. Royalties
earned by the Company are applied to the outstanding deferred royalty
income balance.
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, all of which
are based on the Company's licensed proprietary, bioresorbable polymer
technology, are surgical implants designed to prevent or reduce the formation of
adhesions (scar tissue) following a broad range of surgical procedures. The
Company's product development efforts are currently focused on its lead product,
REPEL-CV(TM) Adhesion Barrier for use in cardiac surgery. In October 2003, the
Company initiated the multi-center pivotal clinical trial for REPEL-CV. In March
2004, the Company realized $2,841,000 from the exercise of warrants to purchase
11,833,000 shares of the Company's common stock. These funds are being used to
fund the REPEL-CV clinical trial as well as other product development activities
and other operating expenses.
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.
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
7
GENERAL (CONTINUED)
such forward-looking statements. Reference is made to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2003, 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, 2004 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 $8,000 for
the three months ended March 31, 2003.
The Company incurred research and development expenses of $338,000 for the
three months ended March 31, 2004, compared to $231,000 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 2004 associated with the REPEL-CV pivotal clinical
trial.
General and administrative expenses totaled $424,000 for the three months
ended March 31, 2004, compared to $362,000 for the comparable prior year period.
The increase in spending is primarily attributable to higher compensation,
insurance and investor relations expenses.
Interest income was $1,000 for the three months ended March 31, 2004 which
was equal to the amount recorded in the prior year period.
Interest expense was $2,000 for the three months ended March 31, 2004
which was equal to the amount recorded in the prior year period.
During the three months ended March 31, 2003, the Company recorded a gain
on settlement of debt of $9,000; there was no comparable amount recorded in the
current year period. The gain was associated with the settlement of trade
payables.
The Company's net loss was $755,000 for the three months ended March 31,
2004. A net loss of $577,000 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
$74,000 for the three months ended March 31, 2004, resulting in a net loss to
common shareholders of $829,000. The deemed non-cash dividend was $105,000 for
the three months ended March 31, 2003, resulting in a net loss to common
shareholders of $682,000. As a result of the conversion of the Series C
Preferred Stock into Common Stock in March 2004, the Company will no longer be
reporting deemed dividends on preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
The cash balances were $2,857,000 and $680,000 at March 31, 2004 and
December 31, 2003, respectively. On March 2004, the Company received $2,841,000
through the exercise of warrants to purchase the Company's Common Stock. (See
Note D) At March 31, 2004, the Company had a working capital surplus of
$2,531,000.
Net cash used in operating activities was $664,000 for the three months
ended March 31, 2004 as compared to $534,000 for the prior year period. Net cash
used in operating activities for the current year period was primarily due to a
net loss of $755,000 reduced by the net non-cash effect of $157,000 in
stock-based compensation expense and an increase in accounts payable and accrued
expenses partially offset by an increase in prepaid expenses. Net cash used in
8
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
operating activities for the prior year period was primarily due to a net loss
of $577,000 reduced by the non-cash effect of $204,000 in stock-based
compensation expense partially offset by an increase in prepaid expenses.
Net cash provided from financing activities for the three months ended
March 31, 2004 was $2,841,000 as compared to $655,000 for the prior year period.
The current period amount was attributable to the exercise of outstanding
warrants whereas the prior period amount was primarily attributable to the
proceeds from the issuance of convertible preferred stock and related warrants.
During the quarter ended March 31, 2004, the Company issued 6,634,000
shares of Common Stock upon the conversion of the Series C Preferred Stock.
The Company's notes payable balance of $110,000 as of March 31, 2004
consists of notes with a principal amount of $40,000 and $70,000 maturing on
August 6, 2006 and February 22, 2007, respectively.
The cash balance as of March 31, 2004 should be sufficient to meet the
Company's cash requirements for operating activities through the remainder of
2004. The Company anticipates seeking additional financing in 2004 and 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.
At March 31, 2004, the Company had employment agreements with two
executives that expire in March 2006 and May 2006 respectively. Pursuant to
these agreements, the Company's commitment regarding early termination benefits
aggregates $309,000 at March 31, 2004.
ITEM 3. 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 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.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During March 2004, holders of outstanding common stock purchase warrants
expiring March 22, 2004, exercised such warrants resulting in the issuance of an
aggregate of 11,833,000 shares of the Company's Common Stock for aggregate cash
consideration of approximately $2,841,000, or $0.24 per shares. The warrants
were previously issued as part of the Company's Series B Convertible Preferred
Stock private placement in March 2002. The offering was made in reliance upon
the previsions of Section 4(2) under the Securities Act of 1933. The offering
was made to a limited number of investors, each of who made investment
representations and are believed to be sophisticated investors.
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.
9
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 Sarbannes-Oxley Act of 2002.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 2004.
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: April 30, 2004
/s/ ROBERT P. HICKEY
----------------------------
ROBERT P. HICKEY
PRESIDENT, CEO AND CFO
EXHIBIT INDEX
ITEM PAGE
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. 11
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 Sarbannes-
Oxley Act of 2002. 12
10