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 June 30, 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 - 59,962,447 shares outstanding at July 22,
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
and six-month periods ended June 30, 2003 and 2004 3
Condensed Balance Sheets as of December 31, 2003 and
June 30, 2004 (unaudited) 4
Condensed Statements of Cash Flows (unaudited) for the
six-month periods ended June 30, 2003 and 2004 5
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 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 10
Signature 12
Certification 13
2
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 Six Months Ended
June 30, June 30,
2003 2004 2003 2004
-------- -------- -------- --------
Revenue
Royalties 5 9 13 17
-------- -------- -------- --------
Revenue 5 9 13 17
Operating expenses:
Research and development 190 323 421 661
General and administrative 563 275 925 699
-------- -------- -------- --------
Operating expenses 753 598 1,346 1,360
-------- -------- -------- --------
(Loss) from operations (748) (589) (1,333) (1,343)
Other income/(expense):
Interest income 4 1 5
Interest expense (1) (1) (3) (3)
Gain on settlement of debt 9
-------- -------- -------- --------
Other income/(expense) (1) 3 7 2
Net (loss) (749) (586) (1,326) (1,341)
Beneficial conversion on convertible preferred stock (73) (178) (74)
-------- -------- -------- --------
Net (loss) to common stockholders $ (822) $ (586) $ (1,504) $ (1,415)
======== ======== ======== ========
Net (loss) per common share-basic and diluted $ (0.02) $ (0.01) $ (0.06) $ (0.03)
======== ======== ======== ========
Weighted average shares outstanding 34,883 59,956 27,090 51,388
3
LIFE MEDICAL SCIENCES, INC.
BALANCE SHEETS
(In thousands, except per share data)
December June
31, 30,
--------------------
2003 2004
-------- --------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 680 $ 2,436
Prepaid expenses and advances 37 148
-------- --------
Total current assets 717 2,584
Acquired technology, less accumulated amortization 293 259
Furniture and equipment, less accumulated depreciation 4 2
-------- --------
TOTAL $ 1,014 $ 2,845
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 363 $ 339
Accrued expenses 76 299
Accrued stock-based compensation 250
-------- --------
Total current liabilities 689 638
Deferred royalty income 197 180
Convertible notes payable-long term 110 110
-------- --------
Total liabilities 996 928
-------- --------
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 59,962 41 60
Additional paid-in capital 40,248 43,459
Unearned stock-based compensation (17)
Accumulated deficit (40,261) (41,602)
-------- --------
Total stockholders' equity 18 1,917
-------- --------
TOTAL $ 1,014 $ 2,845
======== ========
4
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands, except for per share data)
Six months ended
June 30,
------------------
2003 2004
------- -------
Cash flows from operating activities:
Net loss $(1,326) $(1,341)
Adjustments to reconcile net (loss) to
net cash (used in) operating activities:
Depreciation 2
Amortization of acquired technology 17 34
Stock based compensation 538 157
Deferred royalty income (13) (17)
Gain on settlement of debt (9)
Changes in operating assets and liabilities:
(Increase) in prepaid expenses (81) (111)
(Increase) in other receivables (39)
(Decrease) in accounts payable (45) (24)
Increase/(decrease) in accrued expenses (7) 223
------- -------
Net cash (used in) operating activities (965) (1,077)
------- -------
Cash flows from investing activities:
Purchase of equipment (4)
-------
Net cash (used in) investing activities (4)
-------
Cash flows from financing activities:
Proceeds from issuance of convertible preferred stock 653
Proceeds from exercise of stock options and warrants 844 2,833
------- -------
Net cash provided by financing activities 1,497 2,833
------- -------
Net Increase/(decrease) in cash and cash equivalents 528 1,756
Cash and cash equivalents at beginning of period 497 680
------- -------
Cash and cash equivalents at end of period $ 1,025 $ 2,436
======= =======
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):
Six Months ended
June 30,
2003 2004
------- -------
Reported net loss attributable to common stockholders $(1,504) $(1,415)
Stock-based employee compensation expense
included in reported net loss 70
Stock-based employee compensation determined under
the fair value based method (114) (434)
------- -------
Pro forma net loss attributable to common stockholders $(1,548) $(1,849)
======= =======
Loss per common share attributable to common
stockholders (basic and diluted):
As reported $ (0.06) $ (0.4)
======= =======
Pro forma $ (0.06) $ (0.4)
======= =======
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 June 30,
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
During the quarter ended June 30, 2004, the Company granted 1,550,000
stock options to employees. These options have exercise prices at or above the
market price as the date of issue. These options vest at various times through
2006. Also during the quarter, the Company granted 485,000 stock options to
current members and one former member of the Board of Directors. These options
have exercise prices equal to the market price at the date of issue and they
vested immediately.
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) 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. The
Company anticipates completed this trial in mid-2005. In October 2003, the
Company initiated a product development program for an anti-adhesion product for
use in gynecologic surgery which will be based on the Company's proprietary
reverse thermal gel technology. 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 costs and operating expenses. In May 2004, the
Company announced the initiation of a product development program intended to
provide cardiac surgeons with the first ever localized drug delivery product
intended to prevent the onset of atrial fibrillation after open-heart surgery.
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.
7
General (Continued)
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, 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 and six month periods ended June 30, 2004 of
$9,000 and $17,000, respectively, was attributable to royalty income from
product sales of the Sure-Closure System. This compares to royalty income from
the same source of $5,000 and $13,000 for the three month and six month periods
ended June 30, 2003. Pursuant to the underlying agreement, the Company's right
to receive royalties on Sure-Closure System product sales ceases with respect to
all sales occurring after June 30, 2004. As such, the Company will not earn
royalty income in future periods for sales after that date. Royalties on product
sales for the three month period ended June 30, 2004, will be recorded during
the Company's third fiscal quarter at which time the remaining balance of
deferred royalty income will be written off.
The Company incurred research and development expenses of $323,000 and
$661,000 for the three month and six month periods ended June 30, 2004,
respectively, compared to $190,000 and $421,000 for the comparable prior year
periods. The increase in expenditures compared to the prior year is primarily
attributable to higher manufacturing and clinical development expenditures
incurred during 2004 associated with the REPEL-CV pivotal clinical trial.
General and administrative expenses totaled $275,000 and $699,000 for the
three month and six month periods ended June 30, 2004, respectively, compared to
$563,000 and $925,000 for the comparable prior year periods. The decrease in
spending is primarily attributable to lower stock-based compensation expense
partially offset by higher investor relations and insurance expenses.
Interest income was $4,000 and $5,000 for the three month and six month
periods ended June 30, 2004, respectively, compared to $1,000 for the six month
period ended June 30, 2003. The increase is primarily attributable to higher
average cash balances.
Interest expense was $1,000 and $3,000 for the three month and six month
periods ended June 30, 2004, respectively, which were equal to the amounts
recorded in the prior year periods.
During the six months ended June 30, 2003, the Company recorded a gain on
settlement of debt of $9,000; there were no comparable amounts recorded in
either of the current year periods. The gain was associated with the settlement
of trade payables.
The Company's net loss was $586,000 and $1,341,000 for the three month and
six month periods ended June 30, 2004, respectively, compared $749,000 and
$1,326,000 for the comparable prior year periods. The Company expects to
continue to incur losses in future periods.
The Company reflected a deemed non-cash dividend on preferred stock of
$74,000 for the six months ended June 30, 2004, resulting in a net loss to
common shareholders of $586,000 and $1,415,000 for the three month and six month
periods ended June 30, 2004, respectively. The deemed non-cash dividend was
$73,000 and $178,000 for the three month and six Results of Operations
(Continued) month periods ended June 30, 2003, respectively, resulting in a net
loss to common shareholders of $822,000 and $1,504,000. 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.
8
Liquidity and Capital Resources
The cash balances were $2,436,000 and $680,000 at June 30, 2004 and
December 31, 2003, respectively. In March 2004, the Company received $2,841,000
through the exercise of warrants to purchase the Company's Common Stock. At June
30, 2004, the Company had a working capital surplus of $1,946,000.
Net cash used in operating activities was $1,077,000 for the six months
ended June 30, 2004 as compared to $965,000 for the prior year period. Net cash
used in operating activities for the current year period was primarily due to a
net loss of $1,341,000 reduced by the net non-cash effect of $157,000 in
stock-based compensation expense and an increase in accrued expenses partially
offset by an increase in prepaid expenses. Net cash used in operating activities
for the prior year period was primarily due to a net loss of $1,326,000 reduced
by the non-cash effect of $538,000 in stock-based compensation expense partially
offset by increases in prepaid expenses and other receivables as well as a
decrease in accounts payable.
Net cash provided from financing activities for the six months ended June
30, 2004 was $2,833,000 as compared to $844,000 for the prior year period. The
current period amount was primarily 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 six months ended June 30, 2004, the Company issued 6,634,000
shares of Common Stock upon the conversion of the Series C Preferred Stock and
12,200 shares of Common Stock upon the exercise of stock options.
The Company's notes payable balance of $110,000 as of June 30, 2004
consists of notes with principal amounts of $40,000 and $70,000 maturing on
August 6, 2006 and February 22, 2007, respectively.
The cash balance as of June 30, 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 June 30, 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 $347,000 at June 30, 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
end 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.
9
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual meeting of stockholders on April 23, 2004, the
following proposals were voted on and approved as follows:
Proposal 1. Election of Directors
Total Votes For Total Vote Withheld
Each Director From Each Director
David G. P. Allan 29,206,481 652,110
Edward A. Celano 29,206,481 652,110
Barry R. Frankel 29,206,481 652,110
Richard L. Franklin, MD 29,206,481 652,110
Robert P. Hickey 29,206,481 652,110
Walter R. Maupay, Jr. 29,206,481 652,110
Proposal 2. To ratify the appointment of Eisner LLP as the independent
auditors of the Company
For Against Abstain
29,250,381 3,710 600,000
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 Sarbannes-Oxley Act of 2002.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
2004.
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: July 22, 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. 12
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. 13
11