Life Sciences, Inc. (LFSC) - Description of business

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Company Description
BUSINESS DEVELOPMENT Life Sciences, Inc., a Delaware corporation (the "Company", "LSI" or "Registrant"), was incorporated in 1963 to produce and sell specific-pathogen-free, or "SPF", laboratory animals for biomedical research, particularly in the area of cancer. Since 1990 the Company has primarily focused its activities on the production and sale of molecular biology enzymes employed in the synthesis and other manipulations of DNA and other nucleic acids. In 1998 the Company shut down a joint venture then engaged in the incineration of biomedical waste and in 1999 sold an outlying parcel of land to an unaffiliated neighboring business and, in a separate transaction in fiscal year 1999, sold all of its remaining real estate and entered into a lease for the laboratory and office facilities it historically occupied. The latter sale transaction satisfied the $859,075 principal amount of a mortgage on the property and extinguished the additional mortgage indebtedness secured by the property. The Company also eliminated in 1999 an additional $568,829 of principal amount of indebtedness through its conversion into 1,399,927 shares of the Company's Common Stock. In the mortgage satisfaction transaction and the conversion of debt to equity transactions, interest and other amounts aggregating approximately $1,100,000 were forgiven and extinguished. The mortgage satisfaction transaction, the lease transaction, the conversion of debt to equity transactions, and the forgiveness of indebtedness transactions, were each effected with parties affiliated with LSI in a 1999 restructuring of the Company. While revenues during the most recent three fiscal year period beginning June 1, 1997 increased from approximately $1,068,000 to approximately $1,476,000, the Company did not have a material operating profit during that time. Those revenues, the deferral of payment of Registrant's facilities rent obligation for fiscal 2000, and loans from affiliated parties allowed the Registrant to continue in business and in fiscal year 2000 permitted the Company to increase its inventories by 185%. Fiscal year 2000 inventories increased to slightly more than $431,000 in anticipation of increased sales of certain enzyme products during fiscal year 2001. The increases in inventory will also satisfy one of several requirements of a multiple-year supply agreement the Company entered into with it largest customer in May 2000. During fiscal year 2000, the Company also increased its intellectual property related assets by slightly more than $135,000. The number of individuals employed by the Registrant remained relatively constant during the three year period.BUSINESS OF REGISTRANT LSI is a biotechnology company engaged primarily in the production and sale of enzymes used in the synthesis and manipulation of DNA and other nucleic acids. The Company specializes in enzyme products employed by scientists to make genetic (DNA) sequences, which sequences are utilized in basic research and the genetic modification of plants, animals and other organisms. Genetically modified organisms provide the basis for production of unique, genetically engineered drugs, the optimization of certain industrial processes to include food production, and many other applications. For more than 15 years LSI has produced and sold enzymes recovered from retroviruses, a family of viruses that includes HIV, the causative agent of AIDS. Specifically the Company propagates large quantities of avian myeloblastosis virus ("AMV") from which it harvests the enzymes AMV reverse transcriptase and integrase. Reverse transcriptase causes the synthesis of cDNA from an RNA template, while integrase catalyzes the cutting of genetic material and is believed to aid the splicing of retrovirus genes or other foreign DNA into the host's chromosome. 3 In fiscal year 1999, the Company expanded its production capability to include the two enzymes of bacterial origin that in combination with AMV reverse transcriptase are required to carry out nucleic acid amplification using nucleic acid sequence based amplification ("NASBA"). NASBA is a proprietary method for rapid test-tube synthesis of billions of copies of specific fragments of RNA or DNA. NASBA technology, now owned by Organon Teknika B.V. ("Teknika" or "Organon Teknika"), a business unit of Akzo Nobel, B.V., and licensed to other diagnostic manufacturers, is primarily employed in products for assessment of human health to identify the presence and concentration of viral (virus load) and bacterial pathogens in the body fluids of patients with diseases such as HIV infection. In addition to the sale of enzymes produced in its own facilities, the Company also sells enzymes produced by others, as well as products that arise from the combination of these enzymes with other substrates into kits used to carry out certain specific molecular biology reactions. These products include: AMV RT cDNA SYNTHESIS KIT - a product designed to maximize the test tube synthesis of full-length cDNA to provide an optimal template for polymerase chain reaction (PCR) based amplification and other experimental techniques; and NASBA RESEARCH KIT - a product utilized for nucleic acid amplification that is uniquely suited for the amplification of RNA. Organizations engaged in the production and sale of nucleic acid based diagnostic products and molecular biology research products, together with individuals involved in basic genetic research and the development of genetically engineered products, are currently the Company's primary customers for its enzyme products. The Registrant currently derives most of its revenue from the sale of two enzymes, AMV reverse transcriptase and T7 RNA polymerase. When used in combination with the enzyme RNase-H, these products in proprietary combinations are used to cause the directed amplification, or copying, of specific segments of RNA or DNA. This method, along with LSI's enzymes, are employed by the Company and certain of its customers in the identification of pathogens involved in various human diseases and their presence as contaminants in water and other materials that may be ingested by humans. The Company sells its molecular biology enzyme products directly to end users who carry out nucleic acid related research and product development at universities and diagnostic and pharmaceutical manufacturers. Direct mail and internet-based communication are employed in these efforts. The Company also sells its enzyme products to diagnostic kit manufactures, primarily in Europe and Asia where the Company also utilizes independent distributors for distribution of its products in molecular biology research markets. In addition, the Company sells a significant portion of its enzyme production to other manufacturers or resellers who either use the product as a component in kits of their own manufacture, or resell the enzymes in combination with other substrates to end users. The Company employs four professional scientists and eight technicians in its enzyme operations. During fiscal year 2000, nearly 50% of the Company's revenues were derived from the sale of a special combination of three of LSI's internally produced enzyme products to a single clinical diagnostic manufacturer. A supply agreement executed in May 2000 with this manufacturer, Organon Teknika, is expected to require the Company to supply the enzymes at a rate of approximately $500,000 per year until January 2003. During the fiscal year ended May 31, 2000, an amount of the NASBA enzymes substantially in excess of $500,000 was sold to Organon Teknika by the Company. Also during the fiscal year ended May 31, 2000, the Company was dependent on a single Asian independent distributor for an additional 18% of its enzyme-related revenues. The Company has begun development of products for rapid detection of biological contaminants in environment related locations (drinking water and air), as well as in food and certain samples used to identify the causative agent of certain human diseases. All of the Company's planned environmental and clinical diagnostic products for detection of viral or bacterial pathogens are based on Organon Teknika's NASBAtechnology. The Company has licensed the NASBA technology from Organon Teknika for certain specific applications, and expects to reach agreement with other unaffiliated parties to expand the scope of LSI's NASBA related activities. The NASBA method employs some the Company's internally produced enzyme products in conjunction with other substrates to cause rapid replication (amplification) of specific segments of nucleic acids. Confirmation of the presence of large numbers of a single segment of RNA or DNA after the amplification reaction is the basis for determination of the identity of contaminating viruses or bacteria. In 1998 Registrant entered into the second of two agreements with Innovative Biotechnologies, Inc. ("Innovative"), a Niagara Falls, New York company, to provided technical and financial support in the development of a NASBA based test for the waterborne pathogen, Cryptosporidium parvum. This development effort was successfully completed in the Fall of 1999, and in calendar 2000 the Company expects to begin supplying to Innovative all of the molecular biology components of the C. parvum test, as well as distribution of the complete test in certain areas of the World. The Company expects to independently develop additional NASBA based tests for waterborne pathogens. The Company executed in June 1999 a letter of intent with 1144668 Ontario Ltd., ("NumberCo"), a Mississauga, Ontario company, that is expected to enable LSI to produce and sell NASBA based test kits for detection of food borne pathogens. NumberCo, a successor to Cangene Corp., the original owner of the NASBA technology, retained a license to utilize NASBA for detection of food borne pathogens in 1995 when the NASBA related patents and related technology were conveyed to Organon Teknika. The joint venture of the Company and NumberCo contemplated by this executed letter of intent is expected to begin operations in the summer of 2000 and projects introduction of its first product, a NASBA based test for Listeria monocytogenes, to the research market in late 2000. The Company expects to produce and sell additional food borne pathogens tests developed by the planned joint venture with NumberCo. In July 2000 the Company executed a letter of intent with Foshan, Guangdong, China based Vamed Medical Instruments Co. Ltd.("Vamed"), and Beijing Aokai Automation System Engineering Co. ("BAKASC"), a Beijing, China company, to form a joint venture to continue the current business of Vamed and produce and sell nucleic acid based diagnostic products and molecular biology research products in China (including Taiwan) and other countries in the region. Life Sciences is to hold 51% of the equity in the new venture, and would appoint two members of a four member Board of Directors. The current operations of Vamed, the production of an enhanced external counterpulsation ("EECP") apparatus, are to be absorbed into the proposed joint venture together with all other assets of Vamed. The initial capitalization of the joint venture would exceed US$1 million. Key among Vamed's assets is its United States Food and Drug Administration (FDA) GMP certification for production of medical instrumentation at its Foshan facility. Currently Vasomedical, Inc., a Westbury, New York company, distributes within the U.S. most of Vamed's production of the EECP devices. Vasomedical holds a license for all distribution of Vamed's EECP device outside China. The EECP instrument is an external blood circulation assist device that through a one hour per day course of treatment for 30 consecutive days stimulates the growth of new blood vessels at the heart. See In a series of clinical studies in China and the U.S. over the past decade that were recently confirmed in a publication from the Mayo Clinic, EECP therapy has been determined to relieve the pain related from angina in over 85% of the subjects who did not respond to widely used drug therapies through mechanically increasing the blood flow to the heart muscle. While the Company's opportunities for sale of NASBA related products in China are detailed in later sections of this report, the Registrant also contemplates early calendar 2001 start-up of sales of components of nucleic acid based diagnostic kits for detection of pathogenic organisms to its planned China based joint venture in order that that joint venture would be able to supply complete diagnostic kits on an OEM basis to a China based clinical diagnostic laboratory currently performing in excess of one million nucleic acid based diagnostic tests annually. The planned kits would incorporate enzymes produced by LSI and others, together with chemical substratesthat are very similar to those used in NASBA reaction. While these OEM products may require approval from the cognizant Chinese regulatory agency, approval will rest largely on the equivalence of the tests to be produced by the Company with those currently being produced internally by the diagnostic service laboratory. The Company's management believes that such approvals would not require more than six months. In addition to its enzyme related activities, the Company has continued its development of a light based analyzer and related sensors for real-time detection of certain chemicals in the air and in aqueous solutions. This work, begun more than five years ago with U.S. Department of Energy funding in conjunction with Lockheed Martin Corp., was slowed in recent years by the Company's limited working capital. However, the Company's activity in this area led to the February 2000 execution of a letter of intent with Life Sciences Corp. ("LSC"), an unaffiliated, Gaithersburg, Maryland company, and Accident Prevention Plus, LLC ("APP"), a Hauppauge, New York company, to form a joint venture that would operate state-wide alcohol interlock services initially in the states of Florida and Georgia. This letter of intent further contemplates the development and sale of a novel motor vehicle safety related device that combines a breath alcohol detector based motor vehicle ignition interlock with a motor vehicle data logger. The proposal anticipates a to-be-completed definitive agreement that, among other things, is expected to obligate LSC to make available to the proposed joint venture a breath alcohol analyzer based ignition interlock, as to which LSC holds an exclusive license for distribution in North America, and a license to proprietary software that it has developed and currently uses to support state-wide alcohol interlock programs in 13 states. The contemplated definitive agreement is similarly expected to obligate APP to grant a license to the joint venture to utilize APP's proprietary software and related hardware design for a motor vehicle data logger. The letter of intent provides for equal holdings in the proposed venture by each of APP, LSC and the Company. The formation of the proposed joint venture with LSC and APP anticipates rapidly expanding mandated usage of alcohol interlock devices nationwide, as individual states enact legislation and administrative policies to satisfy certain requirements related to monitoring of motor vehicle operators with multiple DUI convictions. Such monitoring or impoundment of vehicles is mandated in provisions of the U.S. Transportation Equity Act for the 21st Century (TEA 21) that take effect in October 2000. The potential for successful, rapid extension of alcohol interlock programs into a large number of states with relatively modest requirements for capital is enhanced by the combination of the interlock devices and data logger. In addition to applications of the proposed integrated instrument related to monitoring the breath alcohol level of a motor vehicle operator prior to starting the vehicle, and from time to time during the course of the vehicle's operation, the data logger component of the device would monitor and magnetically store a record of salient parameters associated with the vehicle's performance. Information related to vehicle speed, acceleration and deceleration rates, engine speed, etc. for over 600 hours of vehicle operation may be stored on a credit card like device, or communicated in real time to other locations via modem. The participants in this proposed joint venture expect to extend the range of applications of the integrated data logger / interlock to embrace monitoring of vehicle operator behavior, including sensors and alarms to detect and warn of drowsiness.COMPETITION The Company competes with independent laboratories, laboratory product distributors, clinical diagnostic producers, and non-profit organizations, many of which are larger and have greater resources than the Company. The enzyme segment of the molecular biology industry in which the Company primarily markets its products is highly fragmented, but includes several companies with substantially greater financial resources, product development capabilities and management depth than LSI. Registrant believes its direct competition in its existing business arises primarily from its competitors' sale of genetically engineeredvariants of its major product, AMV reverse transcriptase, which are sometimes sold at a lower price than the Company's natural-origin product. With respect to its planned environmental and clinical diagnostic products, the Company will encounter entrenched competition from products that incorporate the more widely accepted polymerase chain reaction (PCR) method for amplification of segments of DNA. Vigorous competition is also anticipated in connection with the proposed joint venture concerning interlock and data logger devices.SOURCE AND AVAILABILITY OF MATERIALS The principal supplies used in the Company's business consist of domestic livestock, laboratory plastic ware, glassware, chemicals and animal feed. Except as described below, these supplies are available from numerous suppliers, and the Company has experienced no difficulty in purchasing adequate supplies for its operations. Biological specimens (day old birds) utilized in the production of the virus substrate from which AMV reverse transcriptase is derived, are of a specific type and are not widely available. To insulate itself from disruptions in supply of these birds, LSI has initiated an internal hatchery operation that enables the Company to sustain its supplies of birds through the purchase of fertilized eggs from any of 10 hatcheries throughout the United States. In addition, the Company maintains substantial inventories of the virus substrate, a portion of which is stored at an off-site, contingent production facility.PATENTS, TRADEMARKS AND LICENSES The Company holds a series of nonexclusive licenses that enable it to employ a proprietary technology, nucleic acid sequence based amplification (NASBA), in the production and sale of products for identification of pathogenic organisms, including biological warfare agents in water, food and air. The NASBA license regime also permits the Company to produce and sell, in China and Taiwan only, products for identification of certain viral and bacterial pathogens that cause a variety of human diseases. The Company holds a separate nonexclusive license to produce and sell products incorporating a proprietary liposome-based technology for rapid, low cost electrochemical or colormetric detection and analysis of the outcome of the nucleic acid amplification events engendered in the NASBA reaction. The Company also holds a license to produce and sell a renewable chemical reagent sensor, the FlowProbe, for real time detection of inorganic and organic chemical contaminants in water and other aqueous solutions. In addition to the foregoing, LSI also holds an annually renewable concession from the University of Florida Research Foundation that will permit the Company to operate a contingent production facility at the Sid Martin Biotechnology Center, an affiliate of the University of Florida, for emergency production of LSI's enzyme products using pre-positioned substrates. The availability of a contingent production facility is a necessary condition of a multi-year enzyme supply arrangement between the Company and Organon Teknika.ENVIRONMENTAL MATTERS The Company believes it is in compliance with all relevant federal, state and local environmental regulations, and does not expect to incur significant costs in the foreseeable future to maintain compliance with such regulations.EMPLOYEES At May 31, 2000, the Company employed 21 people, including ten professional employees. 7RESEARCH AND DEVELOPMENT Product development expenses were $118,298 in fiscal 1999 and $163,730 in fiscal 2000. Of these amounts, the majority in 1999 was applied to the expansion of the Company's offering of enzyme products and the creation of novel formulations of the enzymes used in the NASBA reaction in order to satisfy the revised requirements of a major customer. The same enzyme formulations will be used in the NASBA based diagnostic products that will be produced by the Company. In 2000 the bulk of the expense was applied to development of licensed technologies that will be essential to the Company's successful commercialization of NASBA based diagnostic tests. These technologies included methods and apparatus to prepare dried, thermostable enzymes and other substrates used in the NASBA reaction, and a low cost, rapid detection system for detection and enumeration of the RNA amplicons arising from the NASBA reaction. Lesser amounts in 2000 were applied to preliminary experimentation related to the Company's proposed development along with the Centers for Disease Control of a NASBA based test for the detection of the food borne pathogen, Norwalk-like viruses ("NLV"). The remaining amounts were applied in both years to the development of a real time analyzer and related sensors for real-time detection of chemical contaminants in water and air.FORWARD LOOKING STATEMENTS Some of the statements in this report are "forward-looking statements" and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that these forward-looking statements reflect numerous assumptions, known and unknown risks, uncertainties and other factors that may affect the business and prospects of LSI and cause the actual results, performance or achievements of the Company to differ materially from those expressed or implied by the forward-looking statements. These factors include longer product development lead times, delays in product roll outs, failure to obtain anticipated contracts with third parties or orders from customers, or less favorable contracts with third parties or lower than expected volumes from customers, higher material and labor costs, unfavorable patent or other technology decisions, the availability of adequate sources of working capital and cash flow, and economic, competitive, technological, governmental and other factors. In addition, from time to time the Company may make other forward-looking statements in future filings (including exhibits) with the Securities and Exchange Commission, in reports of the Company to its stockholders, and in other communications made by or with the approval of the Company.

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