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, 2001
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.)
PO Box 219 Little Silver, New Jersey 07739
(Address of principal executive offices) (Zip Code)
(732) 728-1769
(Registrant's telephone number, including area code)
Indicate by check 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 - 15,343,342 shares outstanding
at October 30, 2001
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, 2000 and 2001
Condensed Balance Sheets as of December 31,2000 and 4
September 30, 2001 (unaudited)
Condensed Statements of Cash Flows (unaudited) for the 5
nine-month periods ended September 30, 2000 and 2001
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 6. Exhibits and Reports on Form 8-K 9
Signature 10
2
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,
2000 2001 2000 2001
-------- -------- ------- --------
Revenue
Product sales $ 59
Royalties $ 9 $ 9 31 $ 26
-------- -------- ------- --------
Revenue 9 9 90 26
Cost of goods sold 4
-------- -------- ------- --------
Gross profit 9 9 86 26
Operating expenses:
Research and development 16 36 203 376
Sales and marketing 21
General and administrative 140 92 613 511
-------- -------- ------- --------
Operating expenses 156 128 837 887
-------- -------- ------- --------
(Loss) from operations (147) (119) (751) (861)
Other income/(expense):
Interest income 1 2 12 14
Interest expense (1) (1) (1)
Gain on settlement of debt 5 9 5 89
-------- -------- ------- --------
Other income/(expense) 6 10 16 102
-------- -------- ------- --------
Net (loss) (141) (109) (735) (759)
======== ======== ======= ========
Net (loss) per share - basic and diluted $ (0.01) $ (0.01) $ (0.07) $ (0.06)
======== ======== ======= ========
Weighted average shares outstanding 10,279 15,343 10,096 12,303
3
LIFE MEDICAL SCIENCES, INC.
BALANCE SHEETS
(In thousands, except per share data)
December 31, September 30,
------------ -------------
2000 2001
------------ -------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 844 $ 242
Prepaid expenses and advances 110 15
-------- --------
Total current assets 954 257
Furniture and equipment at cost(less depreciation of $47 and $16) 12 2
Other assets
-------- --------
TOTAL $ 966 $ 259
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,120 $ 942
Accrued expenses 162 139
Capital lease obligation 16
Other liabilities 169 106
Advances on equity investment 200
Notes payable-short term 120
-------- --------
Total current liabilities 1,467 1,507
Capital lease obligation 2
Deferred royalty income 296 270
Note payable-long term 40
-------- --------
Total liabilities 1,765 1,817
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value; shares authorized - 5,000;
Series A convertible shares issued and outstanding-500 and none 5
Common stock, $.001 par value; shares authorized - 43,750;
issued and outstanding-10,343 and 15,343 10 15
Additional paid-in capital 36,094 36,094
Accumulated deficit (36,908) (37,667)
-------- --------
Total stockholders' equity (799) (1,558)
-------- --------
TOTAL $ 966 $ 259
======== ========
4
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
-----------------
September 30,
-----------------
2000 2001
------ ------
Cash flows from operating activities:
Net (loss) $(735) $(759)
Adjustments to reconcile net (loss) to
net cash (used in) operating activities:
Loss on sale of equipment 12
Depreciation 21 5
Deferred royalty income (31) (26)
Fair value of options issued as compensation 41
Gain on sale of NQSO by employees 36
Gain on termination of capital lease (10)
Gain on settlement of debt (5) (79)
Changes in operating assets and liabilities:
Decrease in prepaid expenses and advances 10 95
(Decrease) in accounts payable and accrued expenses (82) (120)
(Decrease) in other liabilities (94) (63)
----- -----
Net cash (used in) operating activities (827) (957)
----- -----
Cash flows from investing activities:
Proceeds from sale of equipment 4
-----
Net cash from investing activities 4
-----
Cash flows from financing activities:
Purchase of equipment (1)
Proceeds from exercise of stock option,including paid in capital 110
Payments on capitalized lease (4) (4)
Proceeds from issuance of notes payable 160
Advances on equity investment 200
----- -----
Net cash provided by financing activities 106 355
----- -----
Net Increase/(decrease) in cash and cash equivalents (717) (602)
Cash and cash equivalents at beginning of period 724 844
----- -----
Cash and cash equivalents at end of period $ 7 $ 242
===== =====
Supplemental disclosure of noncash activities:
Termination of capital lease and accrued interest $ 16
Conversion of preferred stock to common stock $ 5
Conversion of other liability to note payable $ 40
5
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 accounting principles generally
accepted in the United States of America 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, 2000 included in the
Company's annual report on Form 10-K filed with the Securities and
Exchange Commission.
B) 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, in the case
of a net loss, reduce the loss per share.
C) Advances on Equity Investment
Included in advances on equity investment as of September 30, 2001,
is $200,000 in payments recently received from investors participating in
an anticipated equity financing scheduled to close upon the receipt of a
minimum of $1 million in aggregate investment.
D) Other
During the nine-month period ended September 30, 2001, the Company
negotiated the termination of an equipment lease. Pursuant to the
arrangement, the Company returned equipment with a net book value of
$6,000 and reduced to $6,000 its obligation which previously consisted of
$18,000 of principal and $4,000 of accrued interest and maintenance fees.
Accordingly, the Company recognized a gain of $10,000. An additional gain
of $79,000 was reported which is attributable to the settlement of
outstanding trade obligations that had previously been charged to general
and administrative and sales and marketing expenses.
6
Item 2. Management's Discussion And Analysis of Financial Condition And Results
of Operations
General
Life Medical Sciences, Inc. is a biomaterials company engaged in the
development and commercialization of innovative and cost-effective medical
devices for therapeutic applications. During 2000, the Company postponed the
further advancement and expansion of product development programs based on its
proprietary bioresorbable polymer technology due to the lack of financial
resources to fund such activities. As a result of this cash shortfall, in July
2000, the Company terminated all but one of its remaining employees. Contingent
upon the receipt of additional funding, 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 preclinical studies.
In February 2000, the Company completed 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. In December 2000, the Company received
approximately $1 million through the combination of a private placement of
convertible preferred stock and the sale of certain state tax losses. The
proceeds of this financing and sale of tax losses have, in part, funded the
ongoing REPEL-CV clinical development program.
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 is currently developing 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)). These products are in
various stages of development.
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. 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.
7
Results of Operations
Revenue for the three and nine month periods ended September 30, 2001 of
$9,000 and $26,000, respectively, was attributable to royalties from product
sales of the Sure-Closure System(TM). These revenue figures compare to $9,000
and $90,000 for the three and nine month periods ended September 30, 2000,
respectively. The revenue figure of $90,000 for the nine month period ended
September 30, 2000 consisted of $59,000 in CLINICEL product sales and $31,000 in
Sure-Closure System royalties. The reduction in revenue is primarily
attributable to the discontinuation of the manufacturing and sale of the
CLINICEL products.
Cost of goods sold of $4,000 for the nine month period ended September 30,
2000 reflects costs to package and ship CLINICEL to the Company's consumer and
trade customers. The Company incurred no cost of goods sold in 2001.
The Company incurred research and development expenses of $36,000 and
$376,000 for the three and nine month periods ended September 30, 2001,
respectively, compared to $16,000 and $203,000 for the comparable prior year
periods. The increase in expenditures compared to the prior year is primarily
attributable to the manufacturing and clinical development activities associated
with the REPEL-CV cardiac surgery adhesion barrier film.
Sales and marketing expenses of $21,000 for the nine month period ended
September 30, 2000, were exclusively associated with CLINICEL and consist
primarily of contracted customer service expense. The Company incurred no sales
and marketing expenses in 2001.
General and administrative expenses totaled $92,000 and $511,000 for the
three and nine month periods ended September 30, 2001, respectively, compared to
$140,000 and $613,000 for the comparable prior year periods. These expenses
consisted primarily of management compensation, legal fees, and other general
and administrative costs. The reduction in spending is primarily attributable to
lower payroll-related expenses.
Interest income was $2,000 and $14,000 for the three and nine month
periods ending September 30, 2001, respectively, and $1,000 and $12,000 for the
comparable prior year periods. Interest expense was $1,000 for both the three
and nine month periods ending September 30, 2001 which was equal to the amount
recorded for the prior year nine month period.
The Company reported gains on the settlement of trade payables of $9,000
and $89,000 for the three and nine month periods ended September 30, 2001,
respectively, compared to $5,000 for both prior year reporting periods.
The Company's net loss was $109,000 and $759,000 for the three and nine
month periods ended September 30, 2001, respectively, compared to $141,000 and
$735,000 for the comparable prior year periods. The Company expects to incur
losses in future periods.
Liquidity and Capital Resources
Cash and cash equivalents were $242,000 and $844,000 at September 30, 2001
and December 31, 2000, respectively. At September 30, 2001, the Company had a
working capital deficit of $1,250,000. The cash and cash equivalents balance as
of September 30, 2001 will not be sufficient to meet the Company's cash
requirements for operating activities through the remainder of 2001. The Company
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 continues to be in discussion with institutional and private
investors regarding a private placement of new equity in amounts sufficient to
support near term operations. The Company recently received a total of $200,000
from investors participating in an ongoing equity financing. This amount was
included in advances on equity investment pending the closing of this financing
which is contingent upon raising a minimum of $1 million. In September 2001, the
Company received $120,000 through the execution of a demand promissory note
which is intended to be converted into equity upon the closing of the above
referenced equity financing. Any additional financings may be dilutive to
existing stockholders. The Company is also pursuing other initiatives, including
additional state tax benefit transfers.
8
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
In July 2001, a judgment was rendered against the Company and in
favor of R.R. Donnelley & Sons Company in the amount of $24,724 related to the
non-payment of trade invoices. The Company is in discussions on the settlement
of this judgment.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended September
30, 2001.
9
SIGNATURE
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 9, 2001 /s/ Robert P. Hickey
----------------------------------
Robert P. Hickey
Chairman, President, CEO and CFO
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