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, 2005
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 - 66,596,447 shares outstanding at April 26, 2005
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
periods ended March 31, 2004 and 2005 3
Condensed Balance Sheets as of December 31, 2004 and
March 31, 2005 (unaudited) 4
Condensed Statements of Cash Flows (unaudited) for the
three-month periods ended March 31, 2004 and 2005 5
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis or Plan of Operation 8
Item 3. Controls and Procedures 10
Part II - OTHER INFORMATION
Item 6. Exhibits 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)
Three months ended
March 31,
-----------------------
2004 2005
-------- --------
Revenue
Royalties $ 8 $
-------- --------
Revenue 8
Operating expenses:
Research and development 338 257
General and administrative 424 262
-------- --------
Operating expenses 762 519
-------- --------
Loss from operations (754) (519)
Other income/(expense):
Interest income 1 7
Interest expense (2) (2)
-------- --------
Other income/(expense) (1) 5
-------- --------
Net loss (755) (514)
Beneficial conversion on convertible preferred stock (74)
-------- --------
Net loss attributable to common stockholders $ (829) $ (514)
======== ========
Net loss per common share-basic and diluted $ (0.02) $ (0.01)
======== ========
Weighted average shares outstanding 43,221 60,331
3
LIFE MEDICAL SCIENCES, INC.
BALANCE SHEETS
(In thousands, except per share data)
December 31, March 31,
-------- --------
2004 2005
-------- --------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 1,861 $ 2,127
Prepaid expenses and advances 40
-------- --------
Total current assets 1,901 2,127
Acquired technology, less accumulated amortization 225 208
Furniture and equipment, less accumulated depreciation 134 127
-------- --------
TOTAL $ 2,260 $ 2,462
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 310 $ 297
Accrued expenses 364 297
-------- --------
Total current liabilities 674 594
Notes payable-long term 110 110
-------- --------
Total liabilities 784 704
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value; shares authorized - 5,000; issued and
outstanding - none
Common stock, $.001 par value; shares authorized - 100,000
issued and outstanding - 59,962 and 66,596 60 66
Additional paid-in capital 43,518 44,308
Accumulated deficit (42,102) (42,616)
-------- --------
Total stockholders' equity 1,476 1,758
-------- --------
TOTAL $ 2,260 $ 2,462
======== ========
4
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
Three Months ended
March 31,
--------------------
2004 2005
------- -------
Cash flows from operating activities:
Net loss $ (755) $ (514)
Adjustments to reconcile net (loss) to
net cash (used in) operating activities:
Depreciation 1 7
Amortization of acquired technology 17 17
Stock based compensation 157
Deferred royalty income (8)
Changes in operating assets and liabilities:
Decrease/(increase) in prepaid expenses (164) 40
Increase/(decrease) in accounts payable (38) (13)
Increase/(decrease) in accrued expenses 126 (67)
------- -------
Net cash (used in) operating activities (664) (530)
------- -------
Cash flows from financing activities:
Proceeds from the exercise of warrants 2,841 796
------- -------
Net cash provided from financing activities 2,841 796
------- -------
Net Increase/(decrease) in cash and cash equivalents 2,177 266
Cash and cash equivalents at beginning of period 680 1,861
------- -------
Cash and cash equivalents at end of period $ 2,857 $ 2,127
======= =======
Non-cash investing and financing activities:
Conversion of Series C preferred stock to 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 U.S. generally
accepted accounting principles; 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, 2004 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 presents 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,
2004 2005
---- ----
Reported net loss attributable to common stockholders $(829) $(514)
Stock-based employee compensation expense
included in reported net loss 17
Stock-based employee compensation determined under
the fair value based method (25) (41)
------ ------
Pro forma net loss attributable to common stockholders $(837) $(555)
====== ======
Loss per common share attributable to common stockholders (basic and
diluted):
As reported $(0.02) $(0.01)
====== ======
Pro forma $(0.02) $(0.01)
====== ======
6
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:
Quarter Ended March 31,
2004
----
Dividend yield 0%
Expected volatility 103%
Risk free interest rate 2.2%
Expected life 2.5 years
The Company did not grant any options in the quarter ended
March 31, 2005.
C) Acquired Technology
In March 2003, the Company purchased certain polymer
technology from Phairson Medical, Ltd., a private medical technology
company based in the United Kingdom, for approximately 6,896,000 shares
of restricted common stock of the Company. These assets comprise a
series of United States and foreign patent applications as well as
scientific and clinical documentation. In connection with this
transaction, the Company recorded $344,000 as the fair value of this
technology which includes (i) $330,000, representing the deemed value
of the shares issued (approximately $0.0478 per share) paid by
investors in the contemporaneous private placement of Series C
Convertible Preferred Stock and related warrants; (ii) $11,000 in
transaction-related costs and (iii) $3,000 representing the fair value
of the options issued as a finder's fee. A useful life of 5 years was
assigned to the acquired technology considering the stage of product
development, the estimated period during which patent protection could
be enforced, which would go well beyond five years from the acquisition
date, the development cycle time for medical devices of the type
envisioned by the Company based on such technology, as well as
potential technology obsolescence over time. For the periods ended
March 31, 2004 and 2005, the Company recorded amortization of $17,000
and $17,000, respectively.
The fair value of the options to purchase 100,000 shares of
common stock issued as a finder's fee was determined to be $3,000 at
the time of the transaction using the Black Scholes pricing model.
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.
E) Exercise of Warrants
In March 2005, the Company received proceeds of $796,000 from
the exercise of warrants to purchase 6,634,000 shares of the Company's
common stock. The warrants were issued in the Series C Convertible
Preferred Stock private placement in March 2003. 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. The
warrants were issued in the Series B Convertible Preferred Stock
private placement in March 2002.
F) 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. As defined in the original
agreement, the royalty period on sales of the Sure-Closure System
expired in June 2004.
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, 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
January 2005, the Company announced that a planned interim analysis of patient
data from the REPEL-CV trial was completed by a Data and Safety Monitoring Board
("DSMB") comprised of medical and biostatistical specialists who are not
participating in the trial. Based on data from over forty patients, the DSMB
recommended that the trial proceed as planned and that no modifications to the
trial protocol were indicated. 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.
In December 2004, the Company received $295,000 from the sale of certain
New Jersey state tax losses. In March 2005, the Company realized $796,000 from
the exercise of warrants to purchase 6,634,000 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.
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, 2004, 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). Pursuant to the underlying agreement, the Company's right to receive
royalties on Sure-Closure System product sales ceased 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. The remaining balance of deferred
royalty income was written off in September 2004 resulting in a gain from
deferred royalty income of $174,000 in that quarter.
The Company incurred research and development expenses of $257,000 for the
three month period ended March 31, 2005 compared to $338,000 for the comparable
prior year period. The decrease in expenditures compared to the prior year is
8
Results of Operations (Continued)
primarily attributable to lower manufacturing and clinical development
expenditures incurred during 2005 associated with the REPEL-CV pivotal clinical
trial.
General and administrative expenses totaled $262,000 for the three months
ended March 31, 2005, compared to $424,000 for the comparable prior year period.
The decrease in expenditures compared to the prior year is primarily
attributable to stock-based compensation expense of $157,000 recorded in the
prior year.
Interest income was $7,000 for the three months ended March 31, 2005
compared to $1,000 for the comparable prior year period. The increase compared
to the prior year is primarily attributable to higher average cash balances and
higher investment yields.
Interest expense of $2,000 for the three months ended March 31, 2005 was
equal to the amount recorded in the comparable prior year period.
The Company's net loss was $514,000 for the three months ended March 31,
2005. A net loss of $755,000 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. With the conversion of the Series C Convertible
Preferred Stock into common stock in March 2004, there is no further recognition
of a deemed non-cash dividend.
Liquidity and Capital Resources
The cash balances were $2,127,000 and $1,861,000 at March 31, 2005 and
December 31, 2004, respectively. In March 2005, the Company received $796,000,
net of expenses, through the exercise of warrants to purchase the Company's
Common Stock. At March 31, 2005, the Company had working capital of $1,533,000.
Net cash used in operating activities was $530,000 for the three months
ended March 31, 2005 as compared to $664,000 for the prior year period. Net cash
used in operating activities for the current year period was primarily due to a
net loss of $514,000 and decreases in accrued expenses of $67,000 and accounts
payable of $13,000 partially offset by an decrease in prepaid expenses of
$40,000. Net cash used in operating activities for the prior year period was
primarily due to a net loss of $755,000 reduced by the non-cash effect of
$157,000 in stock-based compensation expense and an increase in accrued expenses
of $126,000 partially offset by an increase in prepaid expenses of $164,000 as
well as a decrease in accounts payable of $38,000.
Net cash provided from financing activities for the three months ended
March 31, 2005 was $796,000 as compared to $2,841,000 for the prior year period.
The current and prior year period amounts were primarily attributable to the
exercise of outstanding warrants.
The Company's notes payable balance of $110,000 as of March 31, 2005
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 March 31, 2005 should be sufficient to meet the
Company's cash requirements for operating activities through the remainder of
2005. The Company anticipates seeking additional financing in 2005 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. The Company has received a report from the
independent auditors containing an explanatory paragraph stating that certain
conditions raise doubt about the Company's ability to continue as a going
concern.
9
Liquidity and Capital Resources (Continued)
At March 31, 2005, 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 $353,000 at March 31, 2005.
Item 3. Controls and Procedures
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-15(e)
and 15d-15(e); collectively, "Disclosure Controls") as of the end of the period
covered by this quarterly report (the "Evaluation Date") has concluded that as
of the Evaluation Date, our Disclosure Controls were effective to provide
reasonable assurance that information required to be disclosed in our reports
filed or submitted under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified by the SEC,
and that material information relating to our company and any consolidated
subsidiaries is made known to management, including the chief executive officer
and chief financial officer, particularly during the period when our periodic
reports are being prepared to allow timely decisions regarding required
disclosure.
In connection with the evaluation referred to in the foregoing paragraph,
we have identified no change in our internal control over financial reporting
that occurred during the quarter ended March 31, 2005 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Inherent Limitations on Effectiveness of Controls
The Company's management, including the chief executive officer and chief
financial officer, who are the same person, does not expect that our Disclosure
Controls or our internal control over financial reporting will prevent or detect
all error and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control
system's objectives will be met. The design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Further, because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance
that misstatements due to error or fraud will not occur or that all control
issues and instances of fraud, if any, within the company have been detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part on certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Projections of any evaluation of controls effectiveness to
future periods are subject to risks. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance
with policies or procedures.
PART II - OTHER INFORMATION
Item 6. 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.
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: April 26, 2005
/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 Sarbanes-Oxley Act of 2002. 13
11