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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
(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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-20580
LIFE MEDICAL SCIENCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 14-1745197
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
379 THORNALL STREET, EDISON, NEW JERSEY 08837
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(732) 494-0444
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES[X] NO[ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
COMMON STOCK, $.001 PAR VALUE - 9,427,562 SHARES OUTSTANDING
AT NOVEMBER 12,1999
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LIFE MEDICAL SCIENCES, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Operations (unaudited) for the three and 3
nine month periods ended September 30, 1998 and 1999
Condensed Balance Sheets as of December 31, 1998 4
and September 30, 1999 (unaudited)
Condensed Statements of Cash Flows (unaudited) for the 5
nine month periods ended September 30, 1998 and 1999
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition 7
and Results of Operations
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
Exhibit Index 12
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data) (In thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
---- ---- ---- ----
Revenue
Product sales $ 601 $ 24 $ 1,116 $ 1,072
Royalties 4 19 21 36
------- ------- ------- -------
Revenue 605 43 1,137 1,108
Cost of goods sold 257 7 484 379
------- ------- ------- -------
Gross profit 348 36 653 729
Operating expenses:
Research and development 980 226 3,248 647
Sales and marketing 1,129 65 2,683 323
General and administrative 573 275 1,480 1,115
------- ------- ------- -------
Operating expenses 2,682 566 7,411 2,085
------- ------- ------- -------
(Loss) from operations (2,334) (530) (6,758) (1,356)
Interest income 48 5 163 14
Interest expense (1) (1) (3) (2)
Other income 432
------- ------- ------- -------
Net (loss) (2,287) (526) (6,598) (912)
======= ======= ======= =======
Net (loss) per share - basic and diluted $ (0.29) $ (0.06) $ (0.83) $ (0.11)
======= ======= ======= =======
Weighted average shares outstanding 7,923 9,428 7,923 8,473
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LIFE MEDICAL SCIENCES, INC.
BALANCE SHEETS
(In thousands, except per share data)
DECEMBER 31, SEPTEMBER 30,
1998 1999
---- ----
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 485 $ 226
Inventory 264 157
Accounts receivable 120 11
Prepaid expenses and advances 33
-------- --------
Total current assets 902 394
Furniture and equipment-at cost (less depreciation
of $91 and $115) 85 77
Other assets 47
-------- --------
TOTAL $ 1,034 $ 471
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 710 $ 555
Accrued expenses 991 600
Capital lease obligation 8 9
Other liabilities 199 215
-------- --------
Total current liabilities 1,908 1,379
Capital lease obligation 18 12
Deferred royalty income 386 351
-------- --------
Total liabilities 2,312 1,742
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; shares authorized
- 5,000; none issued
Common stock, $.001 par value; shares authorized
- 23,750; issued and outstanding - 7,923 and 9,428 8 9
Additional paid-in capital 34,147 35,065
Accumulated deficit (35,433) (36,345)
-------- --------
Total stockholders' equity (1,278) (1,271)
-------- --------
TOTAL $ 1,034 $ 471
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LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1999
---- ----
Cash flows from operating activities:
Net (loss) $(6,598) $ (912)
Adjustments to reconcile net (loss) to
net cash (used in) operating activities:
Depreciation 24 24
Deferred royalty income (22) (35)
Fair value of options issued as compensation 169
Changes in operating assets and liabilities:
(Increase)/decrease in inventory (352) 107
(Increase)/decrease in accounts receivable (286) 109
(Increase)/decrease in prepaid expenses and advances (257) 33
(Increase)/decrease in other assets (32) 47
Increase/(decrease) in accounts payable and accrued expenses 270 (546)
Increase in other liabilities 303 16
------- -------
Net cash (used in) operating activities (6,950) (988)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (51) (16)
Proceeds from maturity of investment securities 4,836
------- -------
Net cash provided by/(used in) investing activities 4,785 (16)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issue of common stock,including paid in capital 750
Payments on capitalized lease (4) (5)
------- -------
Net cash (used in)/provided by financing activities (4) 745
------- -------
Net (Decrease) in cash and cash equivalents (2,169) (259)
Cash and cash equivalents at beginning of period 2,733 485
------- -------
Cash and cash equivalents at end of period $ 564 $ 226
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LIFE MEDICAL SCIENCES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
A) BASIS OF PRESENTATION
The accompanying condensed financial statements do not include
all of the information and footnote disclosures normally included in
financial statements prepared in accordance with 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, 1998
included in the Company's annual report on Form 10-K filed with the
Securities and Exchange Commission.
B) OTHER INCOME
The Company recorded other income of $432,000 for the
nine-month period ended September 30, 1999. This other income is
attributable to reduction of debt in exchange for certain equipment,
the cost of which had previously been charged to research and
development expense.
C) NET (LOSS) PER SHARE
Basic and diluted net (loss) per share is computed using the
weighted average number of shares outstanding during each period, which
excludes outstanding options and warrants since their inclusion would
reduce the loss per share.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Life Medical Sciences, Inc. (the "Company") is a biomaterials company
engaged in the development and commercialization of innovative and
cost-effective medical devices for therapeutic applications. The Company is
focused on the advancement and expansion of product development programs based
on its proprietary bioresorbable polymer technology. The Company intends to
apply its platform technology to the development of multiple products that
address unmet therapeutic needs or offer improved, cost-effective alternatives
to current methods of treatment. Products currently under development focus on
preventing or reducing post-operative adhesions subsequent to a broad range of
surgical procedures and are in various stages of clinical trials and
pre-clinical studies. In January 1999, the Company initiated a pilot clinical
trial for its REPEL-CV(TM) bioresorbable adhesion barrier film, the first
surgical device approved by the FDA for human evaluation in the prevention of
adhesions after open-heart surgical procedures. Patient enrollment in this trial
was completed during the latest quarter and the data analysis is ongoing. The
Company has also developed a line of novel silicone gel-filled cushions
intended for the prevention and management of hypertrophic and keloid scars.
The Company launched this line under the CLINICEL(R) name in April 1998
through a consumer media campaign and distribution through drug stores and
supermarket pharmacies.
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. The
Company intends to develop bioresorbable adhesion barrier films for the
prevention or reduction of post-operative surgical adhesions in cardio-vascular
surgery (REPEL-CV(TM)), gynecological and general surgical procedures
(REPEL(TM)), as well as in bioresorbable adhesion barrier coatings (viscous
solutions) for the prevention or reduction of post-operative surgical adhesions
in gynecological and general abdominal surgical procedures (RESOLVE(TM)) and
orthopedic and spinal surgical procedures (RELIEVE(TM)).
During 1999 the Company has been allocating its scarce resources to the
REPEL-CV(TM) clinical trials and to activities for the furtherment of its
versatile bioresorbable polymer technology. Activities to secure funding for
these programs have included actions taken with the goal of securing
collaborative agreements with strategic partners, sales and marketing licensing
agreements that include research funding, new equity capital additions and
negotiations on the sale of the CLINICEL business. The Company's application to
participate in a Technology Tax Transfer Program was recently approved by the
Board of Directors of the New Jersey Economic Development Authority. The
program, which is intended to foster the growth of emerging technology companies
in the state, is designed to allow companies to secure funding in exchange for
the sale of net operating losses. The first increment of funding is anticipated
before year end.
Certain statements in this Report on Form 10-Q (the "Report") under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and elsewhere constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, including,
without limitation, statements regarding future cash requirements and the
ability of the Company to raise capital. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company, or industry results,
to be materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: delays in product development; problems or delays
with clinical trials; failure to receive or delays in receiving regulatory
approval; lack of enforceability of patents and proprietary rights; lack of
reimbursement; general economic and business conditions; industry capacity;
industry trends; demographic changes; problems or delays in state economic
developement funding; competition; material costs and availability; the loss of
any significant customers; changes in business strategy or development plans;
quality of management; availability, terms and deployment of capital; business
abilities and judgment of personnel; availability of qualified personnel;
changes in, or the failure to comply with, government regulations; and other
factors referenced in this Report. When used in the Report, statements
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that are not statements of material facts may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "anticipates", "plans",
"intends", "expects" and similar expressions are intended to identify such
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
The Company launched a direct-to-consumer advertising campaign in
conjunction with the introduction of CLINICEL in April 1998 and achieved sales
of $1,715,000 during 1998. Revenue for the three and nine month periods ended
September 30, 1999 of $43,000 and $1,108,000, respectively, consists primarily
of $24,000 and $1,072,000, respectively, of sales of CLINICEL products. The
balance of revenue in those periods is attributable to royalties from product
sales of the Sure-Closure System(TM). These revenue figures compare to $605,000
and $1,137,000 for the three and nine month periods ended September 30, 1998,
consisting primarily of $601,000 and $1,116,000, respectively, of sales of
CLINICEL products. The reduction in revenue for the three months ended September
30, 1999 compared to the comparable prior year period is attributed to lower
CLINICEL sales associated with reduced product advertising and the absence of
drug trade product orders.
Cost of goods sold of $7,000 and $379,000 for the three and nine month
periods ended September 30, 1999, respectively, reflects the cost to produce,
package and ship CLINICEL to the Company's consumer and trade customers. Cost of
goods sold were $257,000 and $484,0000 for each of the comparable prior year
periods. The variations in the cost of goods sold amounts are largely attributed
to changes in sales volume.
The Company incurred research and development expenses of $226,000 and
$647,000 for the three and nine month periods ended September 30, 1999,
respectively, compared to $980,000 and $3,248,000 for the comparable prior year
periods. The reduction in expenditures compared to the prior year is primarily
attributed to reduced spending on the development of bioresorbable adhesion
prevention products and reduced spending for pre-clinical studies and clinical
trials. Research and development spending in 1999 has been primarily to conduct
the pilot clinical trial for REPEL-CV(TM), the first product to receive an IDE
from the FDA for clinical testing to determine safety for use as an
anti-adhesion barrier in cardiovascular surgery.
Sales and marketing expenses of $65,000 and $323,000 for the three and
nine month periods ended September 30, 1999, respectively, were exclusively
associated with CLINICEL and consist primarily of promotional costs, selling
expenses and contracted customer service expense. The comparable prior year
periods' costs were $1,129,000 and $2,683,000, respectively. The reductions in
expense are primarily attributable to reduced advertising and marketing of the
CLINICEL products.
General and administrative expenses totaled $275,000 and $1,115,000 for
the three and nine month periods ended September 30, 1999, respectively,
compared to $573,000 and $1,480,000 for the comparable prior year periods.These
expenses consisted primarily of management compensation, legal fees, and other
general and administrative costs. The reductions in spending are primarily
attributable to reduced legal fees, consulting fees and general cost control.
Interest income was $5,000 and $14,000 for the three and nine month
periods ending September 30, 1999, respectively, and $48,000 and $163,000 for
the comparable prior year periods. The reductions in interest income are
directly attributable to lower balances of cash and cash equivalents.
Interest expense represents interest on capital leases for certain
office equipment.
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The Company recorded other income of $432,000 for the nine month period
ended September 30, 1999. This other income is attributable to a reduction in
accrued expenses in exchange for certain equipment, the cost of which had
previously been charged to research and development expense. There was no
comparable other income in the prior year.
The Company's net loss was $526,000 and $912,000 for the three and nine
months ended September 30, 1999, respectively, compared to $2,287,000 and
$6,598,000 for the comparable prior year periods. The decreases in the net loss
compared to the prior year periods are primarily attributable to reductions in
sales and marketing as well as research and development spending in addition to
the recognition of other income explained above. The Company expects to incur
losses in future periods.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $485,000 and $226,000 at December 31,
1998 and September 30, 1999, respectively.
At September 30, 1999, the Company had a working capital deficit of
$985,000. The current cash and cash equivalents balance as of September 30, 1999
may not be sufficient to meet the Compay's cash requirements for operating
activities through the remainder of 1999. The Company's application to
participate in a Technology Tax Transfer Program was recently approved by the
Board of Directors of the New Jersey Economic Development Authority. The
program, which is intended to foster the growth of emerging technology companies
in the state, is designed to allow companies to secure funding in exchange for
the sale of net operating losses. The first increment of funding is anticipated
before year end. Notwithstanding that potential funding, the Company has an
immediate need for additional capital resources and will be required to raise
substantial additional funds to continue the clinical development and
commercialization of its proposed products and to fund the growth that is
expected to occur if any of its current and proposed products are approved for
marketing. There can be no assurance that such arrangements or financings will
be available as needed or on terms acceptable to the Company. The Company plans
to seek such additional funding through collaborative arrangements with
strategic partners, licensing arrangements for certain of its proposed products
and equity financings. The Company completed a $750,000 private placement of
common stock in the second quarter of 1999 and will continue to evaluate, and
possibly consummate, additional equity financings. Any additional financings
may be dilutive to existing stockholders. The Company is also pursuing other
initiatives, including the possible sale of the CLINICEL business and
licensing/marketing agreements intended to improve its financial condition.
The Company has reduced spending on certain programs as a means of preserving
its cash resources and is currently in discussions with third parties regarding
the licensing of certain technologies which it might otherwise seek to
commercialize itself.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 28, 1999, the Company completed a private placement in which
1,505,003 shares of common stock were sold in consideration for cash proceeds of
$750,000. The proceeds will be, are being and have been used to fund the ongoing
U. S. Pilot Clinical Trial for REPEL-CV and for other corporate expenses. The
securities issued in the private placement were exempt from registration under
Section 4(2) of the Securities Act of 1933 and Regulation D promulgated
thereunder in that the offering was restricted to "accredited investors" as
defined in Rule 501 of Regulation D and the offering did not involve a general
solicitation.
The Company has extended the expiration of its Class A and Class B
redeemable warrants to 5.00 PM (Eastern Time) on March 21, 2000 from September
21, 1999.
ITEM 5. OTHER INFORMATION
The Company uses a number of computer programs across its operations.
The Company has not completed its assessment of the year 2000 issue but believes
that costs of addressing this issue will not have a material adverse impact on
the Company's financial position.
The Company uses a number of third party vendors to support its
operations. The Company has surveyed its key vendors and has received reports
from 70% of these venders that they are Y2 K compliant. Of the remaining key
vendors, the Company believes that, absent widespread Y2 K problems, alternate
vendors may be available should these firms experience Y2 K problems. The
Company's near term developmental efforts will depend on its ability to perform
clinical trials in a surgical setting. Absent widespread Y2 K problems within
the hospital and medical center community, the Company believes that there will
be Y2 K compliant partners capable of performing the procedures necessary for
clinical trials.
Notwithstanding the above, the Company has not completed its assessment
of the year 2000 issue with all of its third party vendors. If any of parties
are unable to address this issue in a timely manner, and the Company is unable
to instead conduct operations with other third party vendors that have addressed
this issue, it could result in a material financial risk to the Company.
The Company is in breach of the CLINICEL licensing agreement with
Dimotech for nonpayment of royalties. However, the Company has secured the
active cooperation of Dimotech, by extending the cure period under which the
Company must comply, in support of the Company's ongoing efforts to sell the
CLINICEL business.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
LIFE MEDICAL SCIENCES, INC.
(REGISTRANT)
DATE: NOVEMBER 15, 1999 /S/ DREW KARAZIN
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DREW KARAZIN
VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
DATE: NOVEMBER 15, 1999 /S/ ROBERT P. HICKEY
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ROBERT P. HICKEY
CHAIRMAN, PRESIDENT AND CEO
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EXHIBIT INDEX
27. Financial Data Schedule
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