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, 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
SYNTHEMED, 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)
LIFE MEDICAL SCIENCES, INC.
(Former name, former address and former fiscal year, if changed since last
report)
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 July 26, 2005
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
SYNTHEMED, INC.
INDEX
Page
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Operations (unaudited) for the three-month 3
and six month periods ended June 30, 2004 and 2005
Condensed Balance Sheets as of December 31, 2004 and 4
June 30, 2005 (unaudited)
Condensed Statements of Cash Flows (unaudited) for the 5
six-month periods ended June 30, 2004 and 2005
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 11
Signature 12
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYNTHEMED, INC.
STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share (In thousands, except per share
data) data)
------------------------------- -------------------------------
Three Months Ended Six Months Ended
------------------------------- -------------------------------
June 30, June 30,
------------------------------- -------------------------------
2004 2005 2004 2005
------------ ------------ ------------ ------------
Revenue
Royalties $ 9 $ 17 --
------------ ------------ ------------ ------------
Revenue 9 17
Operating expenses:
Research and development 353 $ 364 719 $ 694
General and administrative 245 277 641 466
------------ ------------ ------------ ------------
Operating expenses 598 641 1,360 1,160
------------ ------------ ------------ ------------
(Loss) from operations (589) (641) (1,343) (1,160)
Other income/(expense):
Interest income 4 9 5 16
Interest expense (1) (1) (3) (3)
------------ ------------ ------------ ------------
Other income/(expense) 3 8 2 13
Net (loss) (586) (633) (1,341) (1,147)
Beneficial conversion on convertible preferred stock (74)
------------ ------------ ------------ ------------
Net (loss) to common stockholders $ (586) $ (633) $ (1,415) $ (1,147)
============ ============ ============ ============
Net (loss) per common share-basic and diluted $ (0.01) $ (0.01) $ (0.03) $ (0.02)
============ ============ ============ ============
Weighted average shares outstanding 59,956 66,596 51,388 63,498
3
SYNTHEMED, INC.
BALANCE SHEETS
(In thousands, except per share
data)
December 31, June 30,
-------------------------------
2004 2005
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,861 $ 1,550
Prepaid expenses and advances 40
------------ ------------
Total current assets 1,901 1,550
Acquired technology, less accumulated amortization 225 191
Furniture and equipment, less accumulated depreciation 134 119
------------ ------------
TOTAL $ 2,260 $ 1,860
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 310 $ 295
Accrued expenses 364 320
------------ ------------
Total current liabilities 674 615
Convertible notes payable-long term 110 110
------------ ------------
Total liabilities 784 725
------------ ------------
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 44,318
Accumulated deficit (42,102) (43,249)
------------ ------------
Total stockholders' equity 1,476 1,135
------------ ------------
TOTAL $ 2,260 $ 1,860
============ ============
4
SYNTHEMED, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands, except for per
share data)
Six months ended
------------------------------
June 30,
------------------------------
2004 2005
------------ ------------
Cash flows from operating activities:
Net loss $ (1,341) $ (1,147)
Adjustments to reconcile net (loss) to
net cash (used in) operating activities:
Depreciation 2 15
Amortization of acquired technology 34 34
Stock based compensation 157 10
Deferred royalty income (17)
Changes in operating assets and liabilities:
Decrease/(increase) in prepaid expenses (111) 40
(Decrease) in accounts payable (24) (15)
Increase/(decrease) in accrued expenses 223 (44)
------------ ------------
Net cash (used in) operating activities (1,077) (1,107)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of convertible preferred stock
Proceeds from exercise of stock options and warrants 2,833 796
------------ ------------
Net cash provided by financing activities 2,833 796
------------ ------------
Net Increase/(decrease) in cash and cash equivalents 1,756 (311)
Cash and cash equivalents at beginning of period 680 1,861
------------ ------------
Cash and cash equivalents at end of period $ 2,436 $ 1,550
============ ============
Non-cash investing and financing activities:
Conversion of Series C preferred stock into common stock $ 7
5
SYNTHEMED, 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.
Certain items in the condensed financial statements for the three
and six month periods ended June 30, 2005 have been reclassified for
comparative purposes.
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):
Six months ended
June 30,
2004 2005
---- ----
Reported net loss attributable to common stockholders $ (1,415) $ (1,147)
Stock-based employee compensation determined under
the fair value based method (459) (347)
--------- ---------
Pro forma net loss attributable to common stockholders $ (1,874) $ (1,494)
========= =========
Loss per common share attributable to common stockholders (basic and
diluted):
As reported $ (0.03) $ (0.02)
========= =========
Pro forma $ (0.04) $ (0.02)
========= =========
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 June 30,
----------------------
2004 2005
---- ----
Dividend yield 0% 0%
Expected volatility 103% 100%
Risk free interest rate 2.2% 3.8%
Expected life 7 years 7 years
During the quarter ended June 30, 2005, the Company granted 730,000
stock options to employees. These options have exercise prices equal to
the market price at the date of issue. Of these options, 243,334 vest
immediately and the balance vest at various times through 2007. During the
quarter, the Company granted 605,000 stock options to current members of
the Board of Directors. These options have exercise prices equal to the
market price at the date of issue and they vested immediately. During the
quarter, the Company granted 100,000 stock options to consultants to the
Company. These options have exercise prices equal to the market price at
the date of issue. Of these options, 33,334 vest immediately and the
balance vest at various times through 2007. A charge of $10,000 was
included in operating expenses for the quarter ended June 30, 2005 to
reflect the fair value of the stock options granted to consultants which
vested on the date of the grant.
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
options to purchase 100,000 shares of Common Stock 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
June 30, 2004 and 2005, the Company recorded amortization of $34,000 and
$34,000, 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
net proceeds of $2,833,000 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.
7
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. Pursuant to the underlying
agreement, the royalty period on sales of the Sure-Closure System expired in
June 2004.
Item 2. Management's Discussion and Analysis or Plan of Operation.
Certain statements in this Report under Item 2, 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, the success of any pending or proposed clinical trial, the
Company's ability to achieve necessary regulatory approvals and the ability of
the Company to raise required capital. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that 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 that 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.
General
SyntheMed, Inc. is a biomaterials company engaged in the development and
commercialization of innovative and cost-effective medical devices for
therapeutic applications. In May 2005, the Company changed its name to
SyntheMed, Inc. 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 March 2005, the Company announced the initiation of a multi-center
clinical study for REPEL-CV involving several leading cardiac surgery centers in
Europe.
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 is also conducting preclinical studies on an
anti-adhesion product for use in gynecologic surgery. This product development
program is based on the Company's proprietary, bioresorbable reverse thermal gel
("RTG") 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.
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.
8
General (Continued)
Results of Operations
The Company earned no revenue in 2005 compared to revenue for the three month
and six month periods ended June 30, 2004 of $9,000 and $17,000, respectively.
Revenue for the 2004 periods 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
has not earned royalty income on Sure-Closure System product sales since 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 $364,000 and
$694,000 for the three month and six month periods ended June 30, 2005 compared
to $353,000 and $719,000 for the comparable prior year periods. The decrease in
expenditures during the six month period compared to the prior year is primarily
attributable to lower manufacturing and clinical development expenditures
associated with the REPEL-CV pivotal clinical trial partially offset by higher
product liability insurance expenditures and start-up costs for the REPEL-CV
European clinical study.
General and administrative expenses totaled $277,000 and $466,000 for the
three months and six months ended June 30, 2005, respectively, compared to
$245,000 and $641,000 for the comparable prior year periods. The increase in
expenditures for the three month period compared to the prior year is primarily
attributable to higher employee compensation expenses. The decrease in
expenditures for the six month compared to the prior year is primarily
attributable to stock-based compensation expense of $157,000 recorded in the
prior year.
Interest income was $9,000 and $16,000 for the three months and six months
ended June 30, 2005, respectively, compared to $4,000 and $5,000 for the
comparable prior year periods. The increases compared to the prior year are
primarily attributable to higher investment yields.
Interest expense of $1,000 and $3,000 for the three months and six months
ended June 30, 2005, respectively, were equal to the amounts recorded in the
comparable prior year periods.
The Company's net loss was $633,000 and $1,147,000 for the three months
and six months ended June 30, 2005, respectively, compared to $586,000 and
$1,341,000 for the comparable prior year periods. 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 six months ended June 30, 2004, resulting in a net loss to
common shareholders of $1,415,000. 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 $1,550,000 and $1,861,000 at June 30, 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 June 30, 2005, the Company had working capital of $935,000.
Net cash used in operating activities was $1,107,000 for the six months
ended June 30, 2005 as compared to $1,077,000 for the prior year period. Net
cash used in operating activities for the current year period was primarily due
to a net loss of $1,147,000 and decreases in accrued expenses of $44,000 and
accounts payable of $15,000 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 $1,341,000 reduced by the non-cash effect of
$157,000 in stock-based compensation expense and an increase in accrued expenses
of $223,000 partially offset by an increase in prepaid expenses of $111,000 as
well as a decrease in accounts payable of $24,000.
9
Liquidity and Capital Resources (Continued)
Net cash provided from financing activities for the six months ended June
30, 2005 was $796,000 as compared to $2,833,000 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 June 30, 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 June 30, 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.
At June 30, 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 $372,000 at June 30, 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 June 30, 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.
10
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 22, 2005, the
following proposals were voted on and approved as follows:
Proposal 1. Election of Directors
For Withheld
--- --------
David G. P. Allan 42,197,655 412,060
Edward A. Celano 42,231,655 378,060
Barry R. Frankel 42,231,655 378,060
Richard L. Franklin, MD 42,231,655 378,060
Robert P. Hickey 42,231,655 378,060
Walter R. Maupay, Jr. 42,231,655 378,060
Proposal 2. To approve an amendment to the Company's Restated Certificate
of Incorporation changing the Company's name to SyntheMed, Inc.
For Against Abstain
--- ------- -------
41,816,810 202,975 589,930
Proposal 3. To ratify the appointment of Eisner LLP as the Independent
Registered Public Accounting Firm of the Company
For Against Abstain
--- ------- -------
42,552,310 17,250 30,155
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.
11
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.
SyntheMed, Inc.
(Registrant)
By: /s/ Robert P. Hickey
--------------------
Robert P. Hickey
President, CEO and CFO
Date: July 26, 2005
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. 13
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. 14
12