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 September 30, 2006
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.)
200 Middlesex Essex Turnpike, Suite 210 08830
(Address of principal executive offices) (Zip Code)
(732) 404-1117
(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 by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
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 - 82,846,047 shares outstanding at October
26, 2006
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 nine-month periods ended September 30, 2005 and 2006
Condensed Balance Sheets (unaudited) as of December 31, 2005 and 4
September 30, 2006
Condensed Statements of Cash Flows (unaudited) for the 5
nine-month periods ended September 30, 2005 and 2006
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis or Plan of Operation 12
Item 3. Controls and Procedures 14
Part II - OTHER INFORMATION
Item 4. Exhibits 15
Signature 15
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYNTHEMED, INC.
STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except share data)
Three Months Ended Nine Months Ended
----------------------- -----------------------
September 30, September 30,
2005 2006 2005 2006
Revenue
Product sales $ -- $ 62 $ -- $ 62
-------- -------- -------- --------
Revenue -- 62 -- 62
Cost of goods sold -- 9 -- 9
-------- -------- -------- --------
-- 53 -- 53
Operating expenses:
Research and development
Operating expenses:
Research and development 467 486 1,161 1,598
General and administrative 217 322 683 1,918
Sales and marketing -- 35 -- 129
-------- -------- -------- --------
Operating expenses 684 843 1,844 3,645
-------- -------- -------- --------
(Loss) from operations (684) (790) (1,844) (3,592)
Other income/(expense):
Interest income 8 41 24 91
Other income -- -- -- 1
Gain on settlement of debt -- -- -- 22
Interest expense (2) (1) (5) (4)
-------- -------- -------- --------
Other income/(expense) 6 40 19 110
Net loss $ (678) $ (750) $ (1,825) $ (3,482)
======== ======== ======== ========
Net loss per common share-basic and diluted $ (0.01) (0.01) $ (0.03) $ (0.05)
======== ======== ======== ========
Weighted average shares outstanding 66,596 82,821 64,538 77,313
See Notes to Condensed Financial Statements
3
SYNTHEMED, INC.
BALANCE SHEETS
(In thousands, except per share data)
December 31, September 30,
-----------------------
2005 2006
-------- --------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 735 $ 3,956
Accounts Receivable -- 47
Inventory -- 25
Prepaid expenses and deposits 94 149
-------- --------
Total current assets 829 4,177
Acquired technology, less accumulated amortization 157 106
Furniture and equipment, less accumulated depreciation 104 114
-------- --------
TOTAL $ 1,090 $ 4,397
======== --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 359 $ 207
Accrued expenses 487 395
Convertible note payable, current portion 40 70
-------- --------
Total current liabilities 886 672
Convertible note payable, net of current portion 70 --
-------- --------
Total liabilities 956 672
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value; shares authorized - 5,000;
issued and outstanding - none
Common stock, $.001 par value; shares authorized - 150,000
issued and outstanding - 66,596 and 82,821 66 83
Additional paid-in capital 44,318 51,374
Accumulated deficit (44,250) (47,732)
-------- --------
Total stockholders' equity 134 3,725
-------- --------
TOTAL $ 1,090 $ 4,397
======== ========
See Notes to Condensed Financial Statements
4
SYNTHEMED, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands, except for per share data)
Nine Months Ended
---------------------
September 30,
---------------------
2005 2006
------- -------
Cash flows from operating activities:
Net loss $(1,825) $(3,482)
Adjustments to reconcile net (loss) to
net cash used in operating activities:
Depreciation 23 21
Amortization of acquired technology 51 51
Stock based compensation 10 1,298
Changes in operating assets and liabilities:
(Increase) in Accounts Receivable -- (47)
(Increase) in Inventory -- (25)
Decrease/(increase) in prepaid expenses 12 (55)
(Decrease) in accounts payable (29) (152)
Increase / (decrease) in accrued expenses 18 (92)
------- -------
Net cash used in operating activities (1,740) (2,483)
------- -------
Cash flows from investing activities:
Purchase of furniture and equipment -- (31)
------- -------
Net cash used in investing activities -- (31)
------- -------
Cash flows from financing activities:
Repayment of Convertible note payable -- (40)
Proceeds from issuance of common stock -- 5,766
Proceeds from exercise of stock options and warrants 796 9
------- -------
Net cash provided by financing activities 796 5,735
------- -------
Net Increase/(decrease) in cash and cash equivalents (944) 3,221
Cash and cash equivalents at beginning of period 1,861 735
------- -------
Cash and cash equivalents at end of period $ 917 $ 3,956
======= =======
Supplemental disclosure of cash flow information
Non-cash investing and financing activities:
Offering costs paid in common shares -- $ 449
See Notes to Condensed Financial Statements
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, 2005 included in the Company's Annual Report on Form 10-KSB
filed with the Securities and Exchange Commission.
B) Reclassification
The Company has reclassified approximately $224,000 from general and
administrative to research and development for a non-cash compensation charge
recorded at June 30, 2006 associated with the adoption of SFAS 123R, stock-based
compensation for the nine months ended September 30, 2006.
C) Accounts Receivable
Accounts receivable are stated at net realizable value. In the opinion of
management all accounts are fully collectible as of September 30, 2006.
D) Inventory
Inventory is stated at the lower of cost or market, as determined by the
first-in, first-out method.
September 30,
-------------
2006
-------------
Raw materials --
Work in process $ 12,000
Finished goods 13,000
-------------
25,000
Less allowance for obsolescence --
-------------
$ 25,000
=============
E) Stock Based Compensation Plans
At September 30, 2006, the Company has three stock-based compensation
plans: the 2000 Non-Qualified Stock Option Plan, under which the Company is
authorized to issue non-qualified stock options to purchase up to an aggregate
of 1,000,000 shares of common stock; the 2001 Non-Qualified Stock Option Plan,
under which the Company is authorized to issue non-qualified stock options to
purchase up to an aggregate of 10,000,000 shares of common stock and the 2006
Stock Option Plan, under which the Company is authorized to issue incentive
stock options and non-qualified stock options to purchase up to an aggregate of
5,000,000 shares of common stock. At September 30, 2006, there were 3,681,000
options available for grant under these plans. The exercise price is determined
by the Compensation Committee of the Board of Directors at the time of the
granting of an option. Options vest over a period not greater than five years,
and expire no later than ten years from the date of grant.
6
Effective January 1, 2006, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123R, "Share Based Payment." The Company
elected to use the modified prospective transition method, therefore, prior
period results were not restated. Prior to the adoption of SFAS 123R,
stock-based compensation expense related to stock options was not recognized in
the results of operations if the exercise price was at least equal to the market
value of the common stock on the grant date, in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". As
a result, the recognition of stock-based compensation expense was generally
limited to the expense attributed to stock option modifications, as well as the
amortization of certain acquisition-related deferred compensation.
SFAS 123R requires all share-based payments to employees, including grants
of employee stock options, to be recognized as compensation expense over the
requisite service period (generally the vesting period) in the consolidated
financial statements based on their fair values. For options with graded
vesting, the Company values the stock option grants and recognizes compensation
expense as if each vesting portion of the award was a separate award. Under the
modified prospective method, awards that were granted, modified, or settled on
or after January 1, 2006 are measured and accounted for in accordance with SFAS
123R. The impact of forfeitures that may occur prior to vesting is also
estimated and considered in the amount of expense recognized. In addition, the
realization of tax benefits in excess of amounts recognized for financial
reporting purposes will be recognized as a financing activity rather than as an
operating activity.
No tax benefits were attributed to the stock-based compensation expense
because a valuation allowance was maintained for substantially all net deferred
tax assets. We elected to adopt the alternative method of calculating the
historical pool of windfall tax benefits as permitted by FASB Staff Position
(FSP) No. SFAS 123R-3, "Transition Election Related to Accounting for the Tax
Effects of Share-Based Payment Awards." This is a simplified method to determine
the pool of windfall tax benefits that is used in determining the tax effects of
stock compensation in the results of operations and cash flow reporting for
awards that were outstanding as of the adoption of SFAS 123R.
The following table illustrates the effect on net income and earnings per
share if the fair value based method had been applied for the interim periods
ended September 30, 2005 (in thousands, except for per share data):
Nine Months Three Months
Ended Ended
September 30, September 30,
2005 2005
------- -------
Reported net loss ($1,825) ($ 678)
Stock-based employee compensation expense
Included in reported net loss
Stock-based employee compensation determined
Under the fair value based method ($ 401) ($ 54)
------- -------
Pro Forma net loss ($2,226) ($ 732)
======= =======
Loss per common share attributable to common
Stockholders (basic and diluted):
As reported ($ 0.03) ($ 0.01)
Pro forma ($ 0.03) ($ 0.01)
The Company uses the Black-Scholes option pricing model to determine the
weighted average fair value of options. The fair value of options at date of
grant and the assumptions utilized to determine such values are indicated in the
following table:
7
Nine Months Ended
September 30,
--------------------
2006 2005
------ ------
Weighted average fair value at date of grant for
options granted during the period $ 1.05 $ .30
Risk-free interest rates 4.59% 4.0%
Expected option life in years 7-10 7
Expected stock price volatility 98.5% 99%
Expected dividend yield -0- -0-
The following summarizes the activity of the Company's stock options for
the nine months ended September 30, 2006 (shares in thousands):
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Term Value
------------------------------------------------------------
Number of shares under option plans:
Outstanding at January 1, 2006 12,181 $ 0.34 4 Years --
Granted 1,560 0.79 8.9 Years --
Exercised (100) 0.09 -- --
Canceled or expired (80) 2.00 -- --
---------------------------
Outstanding at September 30, 2006 13,561 $ 0.39 3.2 Years* $10,544,674
============================================================
Exercisable at September 30, 2006 12,492 $ 0.36 2.7 Years* $10,091,210
============================================================
* During the nine months ended September 30, 2006, the Company extended the
expiration date of various options by one year, with exercise prices ranging
from $0.05 - $4.75 and expiration dates ranging from 3/31/06 - 12/27/06, granted
to employees, directors, consultants and former employees and directors. As a
result of this option modification, the Company recorded an expense of
approximately $384,000. The Company calculated the incremental value based on
the excess of the fair value of the modified award over the fair value of the
original option measured immediately before its terms were modified based on
current circumstances using the Black Scholes option pricing model.
The total intrinsic value of options exercised during the nine months
ended September 30, 2006 was $66,000.
The following summarizes the activity of the Company's stock options that
have not vested for the nine months ended September 30, 2006 (in thousands,
except per share data):
Weighted Average
Shares Exercise Price
--------------------
Nonvested at January 1, 2006 1,214 $0.60
Granted 1,660 0.79
Canceled or expired (40) 2.00
Vested (1,765) 0.66
--------------------
Nonvested at September 30, 2006 1,069 $0.75
====================
8
As of September 30, 2006, there was approximately $533,000 of unrecognized
stock compensation related to unvested awards (net of estimated forfeitures)
expected to be recognized over the next 24 months.
The Company granted 1,535,000 and 1,660,000 options in the periods ended
September 30, 2005 and 2006, respectively. The Company has recorded a charge of
$239,000 and $1,059,000 in research and development and general and
administrative expense for the fair value of the options granted for the nine
months ended September 30, 2006.
Under SFAS 123R forfeitures are estimated at the time of valuation and
reduce expense ratably over the vesting period. This estimate is adjusted
periodically based on the extent to which actual forfeitures differ, or are
expected to differ, from the previous estimate. Under SFAS 123 and APB 25, the
Company elected to account for forfeitures when awards were actually forfeited,
at which time all previous pro forma expense was reversed to reduce pro forma
expense for that period.
At September 30, 2006, the Company had 135,000 options outstanding which
vest upon FDA approval of certain planned products: 85,000 options associated
with the PMA approval for REPEL- CV(R) Adhesion Barrier and 50,000 options
associated with the IND approval of a drug delivery development program. The
Company also has 35,000 options that vest upon the one year anniversary of the
PMA approval for REPEL- CV. These options have a term ranging from 5 - 6 years
from date of grant and an exercise price range of $0.26 to $2.00. At this time,
the Company cannot determine when the FDA approvals, if any, will be obtained.
F) 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 each of the nine month periods ended September 30, 2005 and 2006,
the Company recorded amortization of $ 51,000.
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.
G) Convertible Promissory Notes
In August 2006, the Company repaid $40,000 of it's 5-year, 6.5%
convertible promissory note to Dimotech, Ltd. The Company's convertible note
payable balance of $70,000 as of September 30, 2006 reflects a note that matures
on February 1, 2007.
9
H) 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 since their inclusion would have been be anti-dilutive.
I) 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.
J) Exercise of Options
In February 2006, the Company received proceeds of $9,000 from the
exercise of options to purchase 100,000 shares of the Company's common stock.
K) Common Stock
In April 2006, the Company sold an aggregate of 15,000,000 shares of
common stock in a private placement at a purchase price of $.40 per share,
resulting in gross cash proceeds of $6,000,000. In connection with the
financing, the Company paid a placement agent a commission equal to $590,000,
representing 10% of the proceeds raised by the agent ($449,840 of which was
paid, at the agent's election, by issuance of 1,124,600 shares of common stock
at the offering price of $0.40 per share, and the balance of which was paid in
cash) and the Company issued to the placement agent warrants to purchase an
aggregate of 1,475,000 shares of common stock, representing 10% of the number of
shares sold by the agent in the financing. The warrants are exercisable at an
exercise price equal to $.60 per share at any time until April 3, 2010. The
Company paid offering costs of $78,000 including amounts to the placement agent
for certain financing-related expenses including legal fees.
In connection with the financing, the Company entered into subscription
agreements and an investor rights agreement with the investors, as well as an
agency agreement with the placement agent. Pursuant to the investor rights
agreement, the Company filed a registration statement with the United States
Securities and Exchange Commission covering resale of the securities sold in the
private placement which has been declared effective.
L) Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") has issued
interpretation No. 48, "Accounting for Uncertainty in Income Taxes--An
Interpretation of FASB Statement No. 109" ("FIN 48"), regarding accounting for,
and disclosure of, uncertain tax positions. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with FASB Statement No. 109, "Accounting for Income Taxes." FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company is currently evaluating the impact FIN 48 will
have on its results of operations and financial position.
In September 2006, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin 108, "Considering the Effects on Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements," ("SAB 108"). SAB 108 requires registrants to quantify errors using
both the income statement method (i.e. iron curtain method) and the rollover
method and requires adjustment if either method indicates a material error. If a
correction in the current year relating to prior year errors is material to the
current year, then the prior year financial information needs to be corrected. A
correction to the prior year results that are not material to those years, would
not require a "restatement process" where prior financials would be amended. SAB
108 is effective for fiscal years ending after November 15, 2006. We do not
anticipate that SAB 108 will have a material effect on our financial position,
results of operations or cash flows.
10
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements," to define fair value, establish a framework for measuring fair
value in accordance with generally accepted accounting principles, and expand
disclosures about fair value measurements. SFAS No. 157 will be effective for
fiscal years beginning after November 15, 2007, the beginning of the Company's
2008 fiscal year. The Company is assessing the impact the adoption of SFAS No.
157 will have on the Company's financial position and results of operations.
M) Revenue Recognition Policy
The Company recognizes revenue when the amounts become fixed and
determinable. Revenue is recognized when product is shipped to customers. Terms
of sale are "f.o.b. shipping point" with the customer covering all costs of
shipment and insurance. All sales are final with no right of return except for
defective product. The responsibility for the replacement cost of a defective
product lies with the contract manufacturer if the defect is related to a
quality issue. The responsibility for the replacement cost of a product damaged
during shipment lies with the freight carrier contracted by the customer.
N) Cost of Goods Sold
The initial quantities of finished goods sold do not have the cost of raw
materials factored in as this cost was previously expensed as research and
development in prior periods. The Company still has remaining raw material that
was previously expensed as research and development which will be depleted over
the next year.
The following table illustrates the effect on cost of goods sold and gross
profit if the cost of the raw material had been included in finished goods
inventory for the interim period ended September 30, 2006 (in thousands):
Nine Months Ended
September 30, 2006
------------------
Reported Net sales $ 62 100%
Pro forma COGS 17 27%
-----
Pro forma Gross Profit $ 45 73%
=====
O) Subsequent Events
On October 5, 2006, the Company received proceeds of $5,000 upon the
exercise of 25,000 common stock options exercisable at $0.20 per share.
11
Item 2. Management's Discussion and Analysis or Plan of Operation.
Certain statements in this Report under this Item 2 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 timing or ability to achieve necessary regulatory
approvals or market launch of REPEL-CV. 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. Such risks and
uncertainties include but are not limited to (i) potential adverse developments
regarding the Company's efforts to obtain required FDA and other approvals; (ii)
potential inability to secure funding as and when needed to support the
Company's activities and (iii) unanticipated delays associated with
manufacturing and marketing activities. Reference is made to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2005 and
Registration Statement on Form SB-2 declared effective on August 1, 2006 (No.
333-134746) 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. 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
Adhesion Barrier, for use in cardiac surgery.
In September 2006, the Company reported positive efficacy results from the
multi-center, randomized, masked pivotal clinical trial of REPEL-CV in neonatal
patients who underwent staged, open-heart surgical procedures. REPEL-CV is a
bioresorbable film designed to be placed over the surface of the heart at the
conclusion of surgery to reduce the formation of post-operative adhesions (scar
tissue). The Company feels confident that the pivotal trial achieved its primary
clinical endpoint based on the level of reduction in the extent and severity of
adhesions. The pivotal trial was conducted at 15 pediatric cardiac surgery
centers throughout the United States, and enrolled 144 neonatal patients who had
undergone staged, open-heart surgical procedures. In this trial, surgeons used a
four point grading system to determine the extent and severity of adhesions in
the patients. Over 70% of the REPEL-CV treated patients were completely free of
clinically-significant adhesions, the most severe grade of adhesions measured,
as compared to less than 30% in the control patients, with a p value < 0.0001.
In the primary clinical endpoint assessment, the mean extent of
clinically-significant adhesions in the control patients was 2.5 times greater
than in the REPEL-CV patients, with a p value = 0.0005. The Company plans to
incorporate the results of this trial into the Premarket Approval (PMA)
submission to the FDA as a basis for obtaining approval to market REPEL- CV in
the United States for use in cardiac surgery.
In June 2006, the Company announced the successful completion of a
multi-center clinical study for REPEL- CV involving several leading cardiac
surgery centers in Europe. At the point of the second surgical procedure, 13 of
the 15 patients in the study were free of clinically-significant adhesions
representing a significant improvement over the typical experience among
patients who have undergone secondary open heart procedures. In August, 2006 the
Company received the CE Mark approval to market REPEL- CV for use in cardiac
surgery within the European Union (EU) and in other international markets. In
September 2006, the Company launched REPEL-CV for sale in the EU and certain
southeast Asian markets through a network of independent distributors, all of
whom are experienced at selling devices and medical equipment to cardiac
surgeons.
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.
Results of Operations
Revenue for the three month and nine month periods ended September 30,
2006 of $62,000, is attributable to the product sales of the REPEL-CV. The
product sales for the three months ended September 30, 2006 is attributable to
the launch of REPEL-CV within the European Union and in other international
markets following the receipt of the CE Mark in August, 2006. There was no
revenue reported for the comparable periods ended September 30, 2005.
Cost of goods sold of $9,000 for the three month and nine month periods
ended September 30, 2006, reflects costs to process and package the REPEL-CV
into saleable form. The cost of the raw material is not included as part of the
cost of goods sold or inventory cost as this was previously expensed as research
and development expense in prior periods. There was no cost of goods sold
reported for the comparable period ended September 30, 2005. (See Note N of
Notes to Condensed Financial Statements.)
12
The Company incurred research and development expenses of $486,000 and
$1,598,000 for the three month and nine month periods ended September 30, 2006
compared to $467,000 and $1,161,000 for the comparable prior year periods,
respectively. The increases in expenditures for the nine month period ended
September 30, 2006 compared to the prior year is primarily attributable to a
non-cash charge of $239,000 associated with adoption of SFAS 123R, stock-based
compensation expense and higher compensation, manufacturing development and
product liability insurance expenditures incurred during 2006.
General and administrative expenses totaled $322,000 and $1,918,000 for
the three months and nine months ended September 30, 2006, compared to $217,000
and $683,000 for the comparable prior year periods, respectively. The increases
in expenditures compared to the prior year periods are primarily attributable to
non-cash charges of $53,000 and $1,059,000, respectively, associated with the
adoption of SFAS 123R, stock-based compensation expense and the modification of
the term of certain stock options. (See Note E of Notes to Condensed Financial
Statements.)
The Company incurred sales and marketing expenses of $35,000 and $129,000
for the three months and nine months ended September 30, 2006; there were no
comparable expenses during the prior year period. These expenses are primarily
associated with REPEL- CV pre-launch marketing costs in the European Union and
other international markets.
There was interest income of $41,000 and $91,000 for the three months and
nine months ended September 30, 2006, compared to $8,000 and $24,000 for the
comparable prior year periods, respectively. The increases compared to the prior
year are primarily attributable to higher average cash balances and higher
interest rates.
A gain on settlement of debt of $22,000 was recorded in the nine months
ended September 30, 2006 associated with the settlement of outstanding trade
payables; there were no comparable amounts recorded during the prior year
periods.
Interest expense of $1,000 and $4,000 for the three months and nine months
ended September 30, 2006 compared to $2,000 and $5,000 for the comparable prior
year periods, respectively.
The Company's net loss was $750,000 and $3,482,000 for the three months
and nine months ended September 30, 2006, compared to $678,000 and $1,825,000
for the comparable prior year periods, respectively. The Company expects to
incur losses in future periods.
Liquidity and Capital Resources
The cash balances were $3,956,000 and $735,000 at September 30, 2006 and
December 31, 2005, respectively. At September 30, 2006, the Company had working
capital of $3,505,000.
Net cash used in operating activities was $2,483,000 for the nine months
ended September 30, 2006, as compared to $1,740,000 for the prior year period.
Net cash used in operating activities for the current year period was primarily
due to a net loss of $3,482,000 partially offset by the impact of $1,298,000 in
non-cash expenses comprised of stock-based compensation expenses, primarily due
to the adoption of SFAS 123R and the modification of options which extended the
exercise period by one year, which were partially offset by a reduction of
$244,000 in accounts payable and accrued expenses
Liquidity and Capital Resources (continued)
and increases of $127,000 in accounts receivable, inventory and prepaid
expenses. Net cash used in operating activities for the prior year period was
primarily due to a net loss of $1,825,000.
Net cash used in investing activities was $31,000 for the nine months
ended September 30, 2006; there was no comparable figure for the prior year. Net
cash used in investing activities was primarily associated with the acquisition
of office furniture and computer and telephone equipment.
13
Net cash provided from financing activities for the nine months ended
September 30, 2006 was $5,735,000, as compared to $796,000 for the prior year
period. The current year amount was comprised of $5,766,000 of net proceeds from
the sale of common stock and $9,000 from the exercise of outstanding options
offset by the repayment of a $40,000 convertible promissory note that matured in
August 2006; the prior year amount resulted from the exercise of stock options
and warrants.
The Company's convertible notes payable balance of $70,000 as of September
30, 2006 reflects a note that matures on February 1, 2007.
The report of the Company's independent auditors relating to the 2005
financial statements contains an explanatory paragraph stating that certain
conditions raise doubt about the Company's ability to continue as a going
concern. In April 2006, the Company completed a private placement in which it
received $6.0 million in gross proceeds in consideration for the issuance of
15.0 million shares of common stock. (See Note G of Notes to Condensed Financial
Statements.) Based on the current plan of operation, the Company anticipates
that its cash balances at September 30, 2006, together with anticipated revenue
from sales of REPEL- CV, should be sufficient to fund cash requirements through
mid-2007. The Company will be required to raise substantial additional funds to
support the commercialization of REPEL-CV and to continue the clinical
development and commercialization of its other proposed products. There can be
no assurance that such arrangements or financings will be available as needed or
on terms acceptable to the Company.
As of September 30, 2006, the Company had employment agreements with four
executives that expire in September 2007, March 2009 and May 2009, respectively.
Pursuant to these agreements, the Company's commitment regarding cash severance
benefits aggregates $514,000 at September 30, 2006. The Company has also entered
into change of control agreements with its two executive officers pursuant to
which, upon the occurrence of events described therein, the Company could become
obligated, in addition to certain other benefits, to pay amounts equal to 200%
and 150% of such officers' annual base salaries, respectively, plus the greater
of the prior year's cash bonus or current year's target bonus. Any severance
payments under the employment agreements would offset amounts required to be
paid under the change of control agreements.
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 September 30, 2006 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.
14
PART II - OTHER INFORMATION
Item 4. 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.
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.
By: /s/ Robert P. Hickey
--------------------
Robert P. Hickey
President, CEO and CFO
Date: November 3, 2006
EXHIBIT INDEX
ITEM
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.
15