<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------
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, 1997
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 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 - 7,922,559 SHARES OUTSTANDING AT NOVEMBER 13,
1997
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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 3
three month and nine month periods ended September 30, 1996
and 1997
Condensed Balance Sheets as of December 31, 1996 4
and September 30, 1997 (unaudited)
Condensed Statements of Cash Flows (unaudited) for the 5
nine month periods ended September 30, 1996 and 1997
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
Signatures 10
Exhibit Index 11
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- -----------------------------------
1996 1997 1996 1997
---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Royalty income $ 36,085 $ 17,299 $ 127,211 $ 50,057
---------------- ----------------- ---------------- ----------------
Operating expenses:
Research and development expenses 712,423 1,664,946 1,669,925 4,294,056
General and administrative expenses 426,953 28,792 1,329,171 1,427,099
---------------- ----------------- ---------------- ----------------
Operating expenses 1,139,376 1,693,738 2,999,096 5,721,155
---------------- ----------------- ---------------- ----------------
(Loss) from operations (1,103,291) (1,676,439) (2,871,885) (5,671,098)
Interest income 196,303 131,816 355,641 455,223
Interest expense (685) (917) (2,131) (2,875)
================ ================= ================ ================
Net (loss) $ (907,673) $ (1,545,540) $ (2,518,375) $ (5,218,750)
================ ================= ================ ================
Net (loss) per share $ (0.12) $ (0.20) $ (0.38) $ (0.66)
================ ================= ================ ================
Weighted average shares outstanding 7,847,497 7,922,559 6,661,228 7,918,108
</TABLE>
3
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LIFE MEDICAL SCIENCES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(unaudited)
DECEMBER 31, SEPTEMBER 30,
--------------------- ---------------------
1996 1997
--------------------- ---------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,235,976 $ 3,035,734
Short-term investments 3,041,993 5,923,058
Other current assets 311,330 128,050
--------------------- ---------------------
Total current assets 14,589,299 9,086,842
Furniture and equipment-at cost (less accumulated
depreciation of $59,830 and $88,009) 182,349 807,354
Deposits 29,190 13,312
===================== =====================
TOTAL $ 14,800,838 $ 9,907,508
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Capital lease obligation $ 6,798 $ 7,320
Accounts payable 111,265 115,450
Accrued expenses 349,447 545,251
--------------------- ---------------------
Total current liabilities 467,510 668,021
Capital lease obligation 34,128 28,571
Deferred royalty income 504,877 454,820
--------------------- ---------------------
Total liabilities 1,006,515 1,151,412
--------------------- ---------------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; shares authorized - 5,000,000;
none issued
Common stock, $.001 par value; shares authorized -
23,750,000; issued and outstanding - 7,914,820 and 7,922,559 7,915 7,923
Additional paid-in capital 33,951,059 34,131,574
Accumulated deficit (20,164,651) (25,383,401)
--------------------- ---------------------
Total stockholders' equity 13,794,323 8,756,096
===================== =====================
TOTAL $ 14,800,838 $ 9,907,508
===================== =====================
</TABLE>
4
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LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
1996 1997
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (2,518,375) $ (5,218,750)
Adjustments to reconcile net (loss) to net cash (used in) operations:
Depreciation 21,582 35,814
Deferred royalty income (111,888) (50,057)
Fair value of options issued as compensation 229,512
Changes in operating assets and liabilities:
(Increase) decrease in other current assets (255,826) 183,280
(Increase) decrease in deposits (8,168) 15,878
Increase in accounts payable, accrued expenses, and other liabilities 314,874 199,989
---------------- ----------------
Net cash (used in) operating activities (2,557,801) (4,604,334)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (30,116) (661,557)
Disposition of equipment 738
Proceeds from maturity of investment securities 3,041,993
Purchase of investment securities (5,923,058)
---------------- ----------------
Net cash (used in) investing activities (30,116) (3,541,884)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capitalized lease (1,812) (5,035)
Proceeds from issuance of common stock, net of expenses 14,117,836
Cost of registration of common stock previously issued (48,989)
---------------- ----------------
Net cash provided by (used in) financing activities 14,116,024 (54,024)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 11,528,107 (8,200,242)
Cash and cash equivalents at beginning of period 3,827,530 11,235,976
================ ================
Cash and cash equivalents at end of period $ 15,355,637 $ 3,035,734
================ ================
</TABLE>
5
<PAGE>
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 should be read in
conjunction with the Company's audited financial statements for the year
ended December 31, 1996 included in the Company's annual report on Form 10-
K filed with the Securities and Exchange Commission.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Life Medical Sciences, Inc. (the "Company") is engaged in the
development and commercialization of innovative and cost-effective medical
products for therapeutic applications. The Company's proposed products are
derived primarily from its two proprietary platform technologies: (i) its
polymer technology, and (ii) its in-situ (occurring on or at a body site) tissue
culturing technology. Products currently under development focus on preventing
or reducing post-operative surgical adhesions, wound healing, stimulating hair
regrowth, improving the success rate of autologous fat transplantation and
diminishing the size, discoloration and discomfort of scars..
Since its inception, the Company has been engaged primarily in research and
development of its technologies, commercialization of the Sure-ClosureTM System
("Sure-Closure") and organizational activities. In September 1993, the Company
began selling its Sure-Closure products. In July 1994, the Company sold its
Sure-Closure product line for initial payments aggregating $4 million plus a 10%
royalty on net sales through June 2004. To date, all revenue has been derived
from sales of the Sure-Closure products or royalties thereon.
Certain statements in this Form 10-Q (the "Report") under this Item 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. 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;
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.
RESULTS OF OPERATIONS
The Company earned revenues from royalties on product sales of Sure-Closure
of $17,299 and $36,085 for the three months ended September 30, 1997 and 1996,
respectively, and $50,057 and $127,211 for the nine months ended September 30,
1997 and 1996, respectively. The royalty income recognized during the three
month period ended September 30, 1997 represents royalties from Sure-Closure
product sales during the second quarter of 1997.
The Company incurred research and development expenses of $1,664,946 and
$712,423 for the three months ended September 30, 1997 and 1996, respectively,
and $4,294,056 and $1,669,925 for the nine months ended September 30, 1997 and
1996, respectively. The increase in the three month and nine month periods
ended September 30, 1997 compared to September 30, 1996 is due to increased
spending for the preclinical and clinical studies of the bioresorbable polymer
adhesion prevention products, the clinical studies of the in-situ tissue
culturing technology products and scar management device; and increased
expenditures supporting the management of the research and development function.
During the third quarter of 1997, the Company terminated its multi-center venous
stasis ulcer trial in Europe on Cariel. The termination of this trial, which
was initiated earlier in 1997, will allow funds that would have been spent on
continued venous stasis ulcer trials to be applied to advancing other
development programs. Additionally, non-cash expenses for stock based
compensation costs of $250,243 were recorded during the nine month period ended
September 30, 1997. Research and development expenses are expected to continue
to increase in future quarters as the Company continues to develop its
bioresorbable polymer technology products and in-situ tissue culturing
technology products and expand clinical trials for these and other products.
7
<PAGE>
General and administrative expenses, which consist primarily of
compensation for management, professional fees, investor relations expenses and
materials, consulting expenses and travel expenses, were $28,792 and $426,953
for the three months ended September 30, 1997 and 1996, respectively, and
$1,427,099 and $1,329,171 for the nine months ended September 30, 1997 and 1996,
respectively. The decrease for the three months ended September 30, 1997 is
attributable to the reversal of a previously recorded non-cash expense for stock
based compensation of $372,592. General and administrative expenses are expected
to continue to increase in future quarters as the Company continues to increase
its scale of operations.
Interest income was $131,816 and $196,303 for the three months ended
September 30, 1997 and 1996, respectively, and $455,223 and $355,641 for the
nine months ended September 30, 1997 and 1996, respectively. The decrease for
the three months period ended September 30, 1997 is primarily attributable to a
decreased average cash balance. The increase for the nine months period ended
September 30, 1997 is primarily attributable to an increased average cash
balance due to the secondary offering of approximately $13.4 million net
proceeds which occurred during the second quarter of 1996.
Interest expense of $917 and $685 for the three months ended September 30,
1997 and 1996, respectively, and $2,875 and $2,131 for the nine months ended
September 30, 1997 and 1996, respectively, was from a capital lease entered into
to acquire office equipment for the Company.
The Company's net loss was $1,545,540 and $907,673 for the three months
ended September 30, 1997 and 1996, respectively, and $5,218,750 and $2,518,375
for the nine months ended September 30, 1997 and 1996, respectively. These
increases are due primarily to the increased scale of operations. The Company
expects to incur additional losses in the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and investments available of $8,958,792 and
$14,277,969 at September 30, 1997 and December 31, 1996, respectively. The
decrease in cash and investments from December 31, 1996 to September 30, 1997
results from the expenditures made for funding the Company's operations which
primarily consists of continued clinical trials, research and development costs,
commercialization of the Company's product portfolio and administrative
expenses.
Although the Company believes that the available cash will be sufficient to
meet its cash requirements for the next twelve months, there can be no assurance
that the Company will not require additional financing during that time or that
financing will be available on acceptable terms or at all. The Company will be
required, however, to raise substantial additional funds to continue the
clinical development and commercialization of its products and to fund the
growth that is expected to occur if any of its products are approved for
marketing. The Company plans to seek such additional funding through
collaborative arrangements with strategic partners, licensing arrangements for
certain of its products and additional public or private financing, including
equity financing. Any additional equity financing may be dilutive to
stockholders. There can be no assurance that such arrangements or financing
will be available as needed or on terms acceptable to the Company. Insufficient
funds may require the Company to delay, scale back or eliminate some or all of
its research and development programs and manufacturing and marketing efforts or
require it to license to third parties certain products or technologies that the
Company would otherwise seek to commercialize itself.
8
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-k
None
9
<PAGE>
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 13, 1997 /S/ DONALD W. FALLON
--------------------------------
DONALD W. FALLON
VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND
TREASURER
(Duly Authorized Officer & Principal
Financial Officer)
10
<PAGE>
EXHIBIT INDEX
27 Financial Data Schedule
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER
30, 1997 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JUL-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 8,958,792 0
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 9,086,842 0
<PP&E> 895,363 0
<DEPRECIATION> 88,009 0
<TOTAL-ASSETS> 9,907,508 0
<CURRENT-LIABILITIES> 668,021 0
<BONDS> 0 0
0 0
0 0
<COMMON> 7,923 0
<OTHER-SE> 8,748,173 0
<TOTAL-LIABILITY-AND-EQUITY> 9,907,508 0
<SALES> 0 0
<TOTAL-REVENUES> 50,057 17,299
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 5,721,155 1,693,738
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,875 917
<INCOME-PRETAX> (5,218,750) (1,545,540)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (5,218,750) (1,545,540)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,218,750) (1,545,540)
<EPS-PRIMARY> (.66) (.20)
<EPS-DILUTED> 0 0
</TABLE>
