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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 JUNE 30, 1998
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 AUGUST 11,
1998
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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
six month and three month periods ended June 30, 1998
Condensed Balance Sheets as of December 31, 1997 4
and June 30, 1998 (unaudited)
Condensed Statements of Cash Flows (unaudited) for the 5
six month periods ended June 30, 1997 and 1998
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 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K
Signatures 11
Exhibit Index 12
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
1997 1998 1997 1998
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenue
Product sales $ $ 515 $ $ 515
Royalties 24 4 33 17
--------------- ----------------- ---------------- -----------------
Revenue 24 519 33 532
Cost of goods sold 226 226
--------------- ----------------- ---------------- -----------------
Gross profit 24 293 33 306
Operating expenses:
Research and development 1,496 1,052 2,629 2,269
Sales and marketing 1,379 1,554
General and administrative 541 528 1,398 907
--------------- ----------------- ---------------- -----------------
Operating expenses 2,037 2,959 4,027 4,730
--------------- ----------------- ---------------- -----------------
(Loss) from operations (2,013) (2,666) (3,994) (4,424)
Interest income 156 20 323 116
Interest expense (1) (1) (2) (2)
--------------- ----------------- ---------------- -----------------
Net (loss) $ (1,858) $ (2,647) $ (3,673) $ (4,310)
=============== ================= ================ =================
Net (loss) per share - basic and dilute $ (0.23) $ (0.33) $ (0.46) $ (0.54)
=============== ================= ================ =================
Weighted average shares outstanding 7,917 7,923 7,916 7,923
</TABLE>
3
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LIFE MEDICAL SCIENCES, INC.
<TABLE>
<CAPTION>
BALANCE SHEETS
(In thousands, except per share data)
December 31, June 30,
------------ ---------
1997 1998
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,733 $ 236
Short-term investments 4,306 2,016
Inventory 261
Accounts receivable 206
Prepaid expenses and advances 90 918
------- -------
Total current assets $ 7,129 $ 3,637
Long-term investments 530
Furniture and equipment-at cost (less depreciation of $58 and $74) 114 128
Other assets 13 47
---------------- ----------------
TOTAL $ 7,786 $ 3,812
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Capital lease obligation $ 8 $ 8
Accounts payable 294 823
Accrued expenses 852 680
---------------- ----------------
Total current liabilities 1,154 1,511
Capital lease obligation 26 22
Deferred royalty income 441 424
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Total liabilities 1,621 1,957
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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 7,923 8 8
Additional paid-in capital 33,988 33,988
Accumulated deficit (27,831) (32,141)
---------------- ----------------
Total stockholders' equity 6,165 1,855
---------------- ----------------
TOTAL $ 7,786 $ 3,812
================ ================
</TABLE>
4
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LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------------------
1997 1998
------------------ --------------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (3,673) $ (4,310)
Adjustments to reconcile net (loss) to net cash (used in) operating activities:
Depreciation 23 16
Deferred royalty income (33) (17)
Fair value of options issued as compensation 516
Changes in operating assets and liabilities:
(Increase) in inventory (261)
(Increase) in accounts receivable (206)
(Increase) in prepaid expenses and advances (142) (828)
(Increase) in other assets (34)
Increase in accounts payable 50 529
Increase/(Decrease) in accrued expenses 305 (172)
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Net cash (used in) operating activities (2,954) (5,283)
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Cash flows from investing activities:
Purchase of equipment (11) (30)
Purchase of investment securities (5,845)
Proceeds from maturity of investment securities 3,042 2,820
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Net cash (used in) provided by investing activities (2,814) 2,790
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Cash flows from financing activities:
Payments on capitalized lease (3) (4)
Cost of registration of common stock previously issued (47)
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Net cash (used in) financing activities (50) (4)
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Net (decrease) in cash and cash equivalents (5,818) (2,497)
Cash and cash equivalents at beginning of period 11,236 2,733
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Cash and cash equivalents at end of period $ 5,418 $ 236
================== ==================
</TABLE>
5
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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 should be read in
conjunction with the Company's audited financial statements for the year
ended December 31, 1997 included in the Company's annual report on Form 10-
K filed with the Securities and Exchange Commission.
B) NET (LOSS) PER SHARE
The net loss per share is computed using the weighted average number
of common shares outstanding during each period. Outstanding options and
warrants have not been considered since their effect would be antidilutive.
C) PREPAID EXPENSES AND ADVANCES
The June 30, 1998 balance includes $690,000 associated with Clinicel
advertising scheduled for the third quarter 1998.
6
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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's
strategy is to apply its proprietary polymer 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 surgical adhesions. The Company has also developed and begun
commercialization of a line of novel silicone gel-filled cushions intended
for the treatment of hypertrophic and keloid scars.
Since its inception, the Company has been engaged primarily in
research and development of its technologies and proposed products,
commercialization of the Sure-Closure System and Clinicel line of products
and organizational activities. In July 1994, the Company sold the Sure-
Closure System and focused its resources primarily on development of its
in-situ tissue culturing technology and bioresorbable polymer technology as
well as proposed products to be derived from such technologies. During the
second half of 1997, the Company concluded that its in-situ tissue
culturing technology products in clinical trials would not yield the
desired benefits and therefore revised its strategy to concentrate its
resources on the proposed products based on its bioresorbable polymer
technology. All revenue to date has been derived from sales of the Sure-
Closure System or the royalties thereon and beginning in April, 1998 from
the sales of Clinicel.
Certain statements in this Report on 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.
When used in the Report, statements 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",
"believes" 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
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RESULTS OF OPERATIONS
In April, 1998, the Company launched a direct-to-consumer advertising campaign
in conjunction with the initial sales of its CLINICEL(TM) silicone gel-filled
cushions and ancillary products for treatment of hypertrophic and keloid scars.
Revenue for the three month and six month periods ended June 30, 1998 of
$519,000 and $532,000 respectively consists primarily of $515,000 in
sales of CLINICEL products and royalties of $4,000 and $17,000 were recorded in
the current year revenue results. These revenue figures compare to $24,000 and
$33,000 for the three month and six month periods ended June 30, 1997
respectively. Total prior year revenue represent royalties from product sales of
the Sure Closure System;
The Company incurred research and development expenses of $1,052,000 and
$1,496,000 for the three month periods ended June 30, 1998 and 1997 respectively
whereas the six month expenses for 1998 and 1997 were $2,269,000 and $2,629,000
respectively. The reduction in spending for the current year periods compared
to 1997 was largely attributed to the reduced level of clinical trial activity.
In 1997, the Company was engaged in two multi-center clinical trials to evaluate
two in-situ tissue culture technology-based products which have been completed.
Current year spending for the three and six month periods is primarily in
support of the range of proprietary post-operative adhesion prevention products
(REPEL(TM), REPEL-CV(TM), RESOLVE(TM) and RELIEVE(TM) based on the Company's
bioresorbable polymer technology, which products are in various stages of
clinical and pre-clinical trials.
Sales and marketing expenses totaled $1,379,000 and $1,554,000 for the three
month and six month periods ended June 30, 1998; there was no comparable
spending in the prior year. The current year expenditures were totally in
support of the product launch and promotion of the CLINICEL line of scar
treatment products which was introduced in April, 1998. These expenditures
consisted of one time creative and production costs associated with packaging
and promotional materials, as well as ongoing advertising and marketing
expenses.
General and administrative expenses, which consist primarily of compensation for
management, investor relations, consulting fees and travel expenses, were
$528,000 and $907,000 for the three and six month periods ended June 30, 1998
respectively; spending for the comparable prior year periods was $541,000 and
$1,398,000, respectively. A non-cash expense for stock based compensation costs
of $331,000 was recorded during the six month period ended June 30, 1997, there
was no such cost incurred during the comparable current year period. Interest
income was $20,000 and $116,000 for the three months and six months ended June
30, 1998, respectively compared to $156,000 and $323,000 for the same prior year
periods, respectively. The reduction in interest income for the current year
periods is directly related to the lower levels of short and long-term
investments reported on the balance sheet.
Interest expense for the three and six month periods ending June 30, 1998
represents interest on capital leases entered into during 1996 and 1997 to
acquire certain office equipment.
The Company's net loss for the three month and six month periods ended June 30,
1998 was $2,647,000 and $4,310,000, respectively compared to $1,858,000 and
$3,673,000 for the same periods ended June 30, 1997, respectively. The
increased current period losses are the result of CLINICEL sales and marketing
expenditures not experienced during the prior year periods. These expenditures
were partially offset by increased gross profit derived from CLINICEL sales. The
Company expects to incur additional losses in future periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and investments available of $2,252,000 and $7,569,000 at
June 30, 1998 and December 31, 1997, respectively. The decrease in cash and
investments during the six month period ended June 30, 1998 resulted from
expenditures made to support the launch and promotion of the CLINICEL product
line, research and development costs to advance its adhesion prevention product
development programs and general and administrative expenses.
8
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The Company believes that the available cash and investment balances will not be
sufficient to meet its cash requirements through the remainder of 1998. The
Company will be required to raise substantial additional funds to continue the
sales growth of the CLINICEL line and support the clinical development programs
for the various adhesion prevention products.
9
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of LMS was held on May 28,
1998.
(b) The following seven Directors were reelected at the Annual
Meeting.
Edward A. Celano Walter Maupay
Coy Eklund Dr. Herbert Moskowitz
Joel L. Gold Irwin M. Rosenthal
Robert P. Hickey
(c) The vote was as follows for the ratification of Richard A. Eisner
& Co., LLP as the Company's independent auditors:
For: 7,191,006
Against: 47,575
Abstain: 22,350
ITEM 5. OTHER INFORMATION
In order to support the continued sales growth of the CLINICEL/TM/ line
and the clinical development programs for the various adhesive prevention
products, the Company will be required to raise substantial additional funds.
In this regard, on July 30, 1998, the Company filed a
registration statement with the Securities and Exchange Commission (SEC)
covering a proposed reduction in the exercise prices of its Class A Warrants
(Nasdaq NM:CHAIW) and Class B Warrants (Nasdaq NM:CHAIZ), both of which expire
on September 21, 1998.
The registration statement specifies that each Class A Warrant, which
entitles the holder to purchase 1.071474 shares of Common Stock and one Class B
Warrant, may be exercised for $1.205, which is equivalent to $1.125 per Common
share. Each Class B Warrant entitles the holder to purchase 1.071474 shares of
Common Stock for an exercise price of $1.205, which is also equivalent to $1.125
per Common share. The Exercise Offer is expected to commence following the
effective date of the registration statement and would continue through 5:00
p.m. (EDT) on September 21, 1998, the expiration date of the Warrants. All
Class A and Class B Warrants not exercised prior to the expiration date will
expire. The offer that is described herein will be made only by means of a
prospectus and may, if required by NASDAQ, be subject to shareholder approval.
The Company has been notified by the staff of the NASDAQ Stock Market
that it no longer meets the net tangible asset requirements for continued
listing on the NASDAQ National Market. The Company has requested a hearing
from the NASDAQ and will seek a review of the staff's findings. The Company
is currently exploring opportunities to raise capital, including the
aforementioned proposed reduction of the exercise price of the Warrants. The
Company believes that the proceeds from the aforementioned financing initiative
should be sufficient to reestablish compliance with NASDAQ listing requirements.
Any financings may be dilutive to stockholders. There can be no
assurance that the Company will be able to secure additional financing when
required or that such 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.
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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)
/s/ ROBERT P. HICKEY
ROBERT P. HICKEY
President & CEO
(Duly Authorized Officer)
Date: August 14, 1998 /S/ DREW KARAZIN
----------------------------
Drew Karazin
VICE PRESIDENT, CHIEF FINANCIAL OFFICER
(Duly Authorized Officer & Principal
Financial Officer)
11
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EXHIBIT INDEX
Item 6. 27 Financial Data Schedule
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1998 FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 APR-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 236 0
<SECURITIES> 2016 0
<RECEIVABLES> 206 0
<ALLOWANCES> 0 0
<INVENTORY> 261 0
<CURRENT-ASSETS> 3637 0
<PP&E> 202 0
<DEPRECIATION> 74 0
<TOTAL-ASSETS> 3812 0
<CURRENT-LIABILITIES> 1511 0
<BONDS> 0 0
0 0
0 0
<COMMON> 8 0
<OTHER-SE> 1847 0
<TOTAL-LIABILITY-AND-EQUITY> 3812 0
<SALES> 515 515
<TOTAL-REVENUES> 532 519
<CGS> 226 226
<TOTAL-COSTS> 1780 1605
<OTHER-EXPENSES> 3176 1580
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2 1
<INCOME-PRETAX> (4310) (2647)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4310) (2647)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4310) (2647)
<EPS-PRIMARY> (.54) (.33)
<EPS-DILUTED> (.54) (.33)
</TABLE>
