-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DoyWgxLcnqS0Cc+8flbgguCiXNnI1BiZbApapxYXJwOXeY1tFHQmmeoh1jsZSlhW YQhnkKYXqdQHOOuzHQLUYg== 0001144204-06-045319.txt : 20061106 0001144204-06-045319.hdr.sgml : 20061106 20061103173716 ACCESSION NUMBER: 0001144204-06-045319 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061106 DATE AS OF CHANGE: 20061103 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SyntheMed, Inc. CENTRAL INDEX KEY: 0000889428 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 141745197 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-20580 FILM NUMBER: 061188032 BUSINESS ADDRESS: STREET 1: PO BOX 219 CITY: LITTLE SILVER STATE: NJ ZIP: 07739 BUSINESS PHONE: 7327281769 MAIL ADDRESS: STREET 1: PO BOX 219 CITY: LITTLE SILVER STATE: NJ ZIP: 07739 FORMER COMPANY: FORMER CONFORMED NAME: LIFE MEDICAL SCIENCES INC DATE OF NAME CHANGE: 19930328 10QSB 1 v056455_10qsb.txt 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 EX-31.1 2 v056455_ex31-1.txt EXHIBIT 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. I, Robert P. Hickey, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of SyntheMed, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Dated: November 3, 2006 By: /s/ Robert P. Hickey --------------------------------- Robert P. Hickey Chief Executive Officer and Chief Financial Officer EX-32.1 3 v056455_ex32-1.txt EXIBIT 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.* In connection with the accompanying Quarterly Report on Form 10-QSB of SyntheMed, Inc. for the quarter ended September 30, 2006, the undersigned hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that: (1) such Quarterly Report on Form 10-QSB for the quarter ended September 30, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in such Quarterly Report on Form 10-QSB for the quarter ended September 30, 2006 fairly presents, in all material respects, the financial condition and results of operations of SyntheMed, Inc. November 3, 2006 /s/ Robert P. Hickey ---------------------------------------- Name: Robert P. Hickey Title: Chief Executive Officer and Chief Financial Officer * A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided by SyntheMed, Inc. and will be retained by SyntheMed, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----